Borrower Education Most Effective Before Default

MBA (9/30/2008 ) Palaparty, Vijay
More than two-thirds of homeowners said they would sell their homes if they were unable to pay their mortgages, in a survey from Campbell Communications, Washington, DC. However, fewer than half of already delinquent borrowers expressed similar sentiment.
“If servicers wish to educate borrowers or positively influence their behavior, they stand the best chance of doing this before the borrower has gone into default,” said Tom Popik, designer of the survey.

The report said both lenders and servicers should focus on borrowers who are current on their mortgages and not only on those who are delinquent. It noted that borrowers’ psychology changes as they fall behind on their payments and that they are much more willing to take steps to avoid foreclosure before they become delinquent.

In August, the HOPE NOW Alliance, of which the Mortgage Bankers Association is a founding member, reported that 2.07 million homeowners avoided foreclosure and have been able to stay in their homes as of July. It also announced that the number of foreclosures prevented in July was at a record high for the second consecutive month, 6 percent higher than the number of foreclosures prevented in June. Compared to July 2007, the number of foreclosures prevented increased by more than 54 percent.

HOPE NOW mortgage servicers help homeowners avoid foreclosure through both modifications to the terms of existing mortgages and repayment plans. Workouts are intended to be permanent changes that, barring a life event such as a job loss, death or illness, will enable the homeowner to stay in the home as long as he or she wishes to do so.

“Loan resolution consultants need to educate borrowers about solutions that fit their situation and negotiate a mutually beneficial alternative to foreclosure,” said Steven Home, president of Wingspan Portfolio Advisors, Dallas. “Informed listening by trained and experienced loan resolution consultants can be invaluable at this stage.”

The Campbell report said borrowers knew very little about their legal liability if they were to participate in a short-sale, abandon or default outright. Fewer than one-fifth of borrowers said they were aware of any potential financial consequences from these actions.

“After default, borrowers tend to put aside plans such as selling their house to pay off the mortgage,” Popik said. “Instead, they develop alternative plans that result in a higher loss severity for servicers and investors, such as declaring bankruptcy or staying in the house until eviction. They also are generally unaware of the financial repercussions of defaulting on their mortgages.”

Homeowners’ equity in their homes also correlated with loan performance. The report said borrowers with home equity were 2.5 times more likely to sell their home if they were unable to pay their mortgage than those without equity. Additionally, borrowers with negative equity were more likely to be delinquent than those with positive home equity.

“Highly delinquent borrowers tend to be motivated to stay in their homes,” Home said. “Their desire to preserve normalcy means they will frequently pay even when conventional net present value-based workout decisioning models would never approve a repayment alternative.”

Increase in monthly payments was cited as the number one reason borrowers did not make mortgage payments. More than three-quarters of borrowers who were past due on their mortgage payments were willing to have missed payments, penalties and late fees added to their mortgage if it would help them avoid foreclosure.

Paul Wright, senior vice president at DRI Management Systems, Newport Beach, Calif., said lenders need much information about borrowers and their current financial situation to be better prepared to deal with each individual case. This information includes source of income(s), location of property, employment and whether borrowers had payment issues in the past and how they were resolved.

“The problem today is the sheer volume may not provide the luxury of gathering data in time to make the contact,” Wright said. “If it is gathered, the percentage of more favorable workouts will be higher.

The survey was sponsored by Inside Mortgage Finance.