Solving the servicing dilemma: straight talk is the only cure.

Asage once advised, "If you don't know where you're going, any road will get you there." I'm reminded of this faintly tongue-in-cheek counsel each time a new report emerges on the foreclosure crisis sweeping the country, offering up fresh evidence that yesterday's "breakthrough" solution to stemming this toxic tide has fallen short. It behooves us, then, to take pause when considering today's newest nostrum, because it, too, has a high likelihood of being cast aside by tomorrow, in favor of ... you guessed it, yet another bright idea.

The proof of this mismatch is painfully obvious. Last year, more than 60 percent of mortgages modified for private investors missed a payment after six months and more than half of bank-owned (portfolio) loans faltered in the same time period. Even government-sponsored enterprise (GSE) loans were not immune. According to the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), 58 percent of Freddie Mac-modified loans and 57 percent of Fannie Mae-modified loans were 30 days past due after six months.

Before descending too far into the darkness, giving readers the idea that I am a pure nihilist on the housing problem (as in: nothing will ever solve this thing), let me say I actually am fairly optimistic that we eventually will wade through the waste and come out the other side stronger. In order to do this, however, we must start looking at the default destruction for what it really is. This is not just a misfiring car engine (apologies to Detroit's once-Big Three) in need of only a modest tune-up. The housing market, and for that matter the entire economy, has very nearly crashed from a massive amount of self-delusion and wishful--or hopeful--thinking.

Straight talk is the only cure. So let's start the conversation with this understanding: A "foreclosure holiday" (a.k.a. moratorium), already offered by some lenders and put into effect in states such as Massachusetts, may feel good at first, but it's bad news down the road and essentially just delays the inevitable.

The cost of such a free lunch to our economic system and financial institutions is enormous, not to mention the pain it visits on our credibility with not only our citizen taxpayers but also with our foreign debt holders. They would be right to assume that our contracts mean nothing, if we say this in so many legislative ways.

Some debtors will never perform

So, let's start the solution process by acknowledging a little secret that keeps servicers awake at night staring at the ceiling, fearing the next sunrise. Some debtors will never perform as expected, because they just cannot afford their loans. You can mark down the monthly payments 30 percent, postpone the maturity date or even forgive some principal, but these poor folks (literally and figuratively) just don't have the dough--and won't, no matter what you do.

The reasons are legion, so pick one: job loss, family dissolution, fraud, health problems and so on. No matter. In those cases, the best and fairest settlement is a moving van. (Before you label me harsh, ask how much more humane it is to let people stay in a house with the inevitable sword hanging over their heads, i.e., with a debt they will never be able to pay short of another valuation bubble that is not coming back.)

For those pressed borrowers who can stay in and save their homes, I recommend they bypass the chat rooms and office water cooler and go straight to their servicers. Unfortunately, few people pick up the phone to do that even though some servicers are really willing to go out of their way to help.

At the Mortgage Bankers Association's (MBA's) National Mortgage Servicing Conference in February, one after another servicer lamented about the double-whammy delivered by customers they can't reach and others who can't reach them (the first because of fear, the second because of volume).

Fear does paralyze people who are in trouble, but you might be surprised how often it's more a case of "toy denial"--borrowers simply don't want to give up their big-screen TVs, cell phones, giant cars or the dozen credit cards that prop up this impossible lifestyle, even while they'd want their mortgages modified downward to their comfort levels. It creates a dilemma for servicers, who become social workers trying to figure out who really deserves help.

And it is a challenge made all the more difficult because traditional servicers are reeling under the strain of crashing collateral in this defaulting market. Budgets configured for uninterrupted collections, escrow accumulations and payout transactions are dwarfed by the giant-sized costs of tracking delinquent customers, multiple communications with them and proactively identifying people who can and should be helped. These are all extremely time-consuming tasks, especially in this case, where time is money.

Moreover, many servicers are neither qualified nor experienced enough to develop proper underwriting guidelines or implement them. And how many servicers have the staff, both in quantity and quality, to gather and review full documentation to prove a borrower's income? Furthermore, are servicers either fully trained or taking the time to train employees to determine the true debt-service obligations of a borrower? What are servicers doing to verify a borrower's accurate cash inflows and outflows?

Servicers also have a couple of feet on the proverbial banana peel with an inability even to take some basic and critical steps such as financing servicing advances.

Asset manager with authority

As a result, "big-box" servicers are now yielding to a next generation of boutique servicers with the resources and expertise to deal with these unprecedented problems. The smaller shops (sometimes called component servicers) are proving more nimble and adept at giving ownership of delinquent loans to a single asset manager who has the authority to make decisions on that asset. It is not done by committee requiring three levels of sign-offs.

This approach allows servicers to help people, but only if it can be done expeditiously--before conditions change further and make the new deal useless. But even then we have a significant normative, if not moral, issue. Even if servicers were able to determine a debt-to-income ratio accurately, such a ratio is only one-half of what's required for underwriting. The other part is collateral.

If someone can afford under prudent underwriting guidelines, for example, a payment of only $1, 200 per month, should that borrower be given the opportunity to make that payment on a home that today is worth $500,000 because the borrower purchased the home two years ago for $700,000 with a stated-income, 100 percent loan-to-value (LTV) loan? Why should the current owner of that loan--who more often than not did not originate that loan--take the hit so a borrower can stay in a home that the borrower should have never purchased in the first place?

Borrowers need to be educated and made to understand that sometimes old-world underwriting rules should be followed--such as never buying a home that has a value in excess of three times that borrower's gross annual income.

The name of the game, then, is talking with borrowers and getting them to not only take action, but to "get real." That requires a servicer with the ability to be both high-touch and efficient, with all solutions on the table.

Janice Ramocinski is chief operating officer of Kondaur Capital Corporation, Orange, California, which acquires, manages, services and liquidates distressed mortgage loans, She can be reached at [e-mail].