Sunday, September 16, 2007
Loan servicers help delinquent borrowers
Loan servicing companies step up staffing, training to deal with borrowers in trouble.
The Orange County Register
Seven months ago, home loan servicer EMC Mortgage averaged 1.7 million calls per month to troubled borrowers.
Today, it makes more than double the calls at 4 million.
EMC and other loan servicers – firms that send bills to homeowners and collect mortgage payments – are under pressure from politicians and consumer groups to help keep people in their homes at a time of growing foreclosures.
Experts say foreclosures, which are already rising fast, will spike even further as low introductory rates end on millions of adjustable mortgages. Analysts say many of the 8.37 million adjustable-rate mortgages made between 2004 and 2006 will reset over the next year.
The issue hits home in Orange County, where lenders are foreclosing on more and more homes of delinquent borrowers. Last month, for example, banks foreclosed on 469 homes in the county – the highest total in close to a decade, reports DataQuick.
And the county, once the epicenter of subprime lending, has seen 4,400 real estate jobs evaporate over the year ended in July as major lenders, such as Irvine-based New Century Financial and Ameriquest Mortgage in Orange, shut down.
Working with delinquent borrowers is more complicated today than in the past, when the bank made a loan and held onto it. In recent years, lenders turned about 70 percent of prime loans and about 90 percent of subprime loans into securities and sold them to Wall Street investors, according to First American Loan Performance.
That means the company servicing a loan usually doesn't own it.
Kurt Eggert, a law professor at Chapman University School of Law, said that now the nine-year-long housing boom is over, servicers are hard pressed to change how they do business.
"In the past they were mostly fixated on being money collectors," Eggert said. "That's their job – to collect money and foreclosure if they don't get it. Now we are asking that they become more touchy-feely and work with borrowers to avoid foreclosure. That's a fundamental change in their whole makeup."
Companies say they are changing.
John Vella, head of EMC Mortgage, a unit of mega investment bank Bear Stearns, said his company has 200 workers in Irvine and is hiring 100 more to deal with borrowers in trouble. EMC employs 1,500 in all.
"Over the last few months I think the whole industry has seen a rise in delinquencies and loans in foreclosure, and that's where our staffing growth has occurred," he said. "We are being very proactive in hiring staff to work with our customers who are having difficulty."
Helping delinquent borrowers is hard work, Vella said. It's a challenge just to get them on the phone, he said.
Experts say borrowers are often embarrassed about their financial woes and avoid facing the problem.
Bear Stearns services about 500,000 loans totaling close to $80 billion. The investment bank was a major buyer and seller of subprime loans during the housing boom, and bought the loan-making operation of struggling subprime lender ECC Capital in Irvine.
Vella said EMC receives about 150,000 calls a month, up from 125,000 six months ago. They make many more calls, however – about 4 million a month.
That suggests EMC employees make at least 15 calls an hour on average.
"You have to understand that you have to make multiple phone calls to reach someone," Vella said. "One of the most difficult things in this industry is to contact the borrower. If we never talk to the customer, we cannot work with them on trying to save their home."
So what are Bear Stearns and others willing to do for borrowers? That's the big, controversial question of the day.
Companies say they are willing to work with borrowers because foreclosures are expensive. Foreclosures cost about $50,000 a pop – and that's not including if the home is sold for less than what's owed to the bank, experts say.
Vella and other companies say they are willing to do whatever it takes, but each borrower's situation is different.
Experts say most of the time companies work with borrowers without changing the actual terms of a loan.
In a first-quarter survey of nearly all subprime loan servicers, Fitch Ratings found that up to 75 percent of the time companies allow borrowers to make up missed payments later. Missed payments can be spread over the remainder of the loan, added on at the very end, or erased completely.
Sometimes, however, borrowers need more help.
In very few cases, companies have reduced interest rates on loans or allowed borrowers to owe less principal. Troubled borrowers basically get a break. Lowering the interest rate, for example, can shave hundreds of dollars a month from payments.
However, if debt is forgiven there could be tax consequences.
Consumer advocates have called on lenders to extend the low introductory rate on some subprime mortgages to the full term of the loans.
While such loan changes are rare so far, Fitch, which rates bonds backed by home loans, said it expects that to change. Servicers will likely change more loan terms as resets increase on subprime loans.
Robert Lacoursiere, an analyst with Bank of America, said in a June 22 report that resets on all adjustable loans will peak in March and April 2008. In all, about $680 billion of loans are due to reset next year, on top of $515 billion resetting this year.
Eggert said it remains to be seen if servicers will be willing to change terms on many loans. He said modifying loan terms is "expensive and requires a lot of human contact."
"How are the servicers going to get paid to do that and how will they get paid to hire all the people they will need to do extensive loan modifications?" Eggert said.
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