BiggerPockets

Loss Mitigation Deal Flow

Ok, now let me explain the flow of a deal through loss mit. Let me preface this with I agree with those who think the system is not the best but everyone's loan has to be reviewed by two or three different people depending on what they are doing with it. It takes a long time to go through the system (too long). Also think about the 50-200 identical files just like yours on the desk of pretty much everyone. They are processed in the order received with priority given to those that have an upcoming foreclosure sale. It takes time to go through those deals.

First we will start with some broad strokes and then give a bit more detail on each area. Remember, this is an overview. I could go on and on about this. A loss mit department is generally divided into 3 main sections. First is the front-end people who receive the workout packages. Next are the actual processors who review the deal and process the workout based on what the regulations tell them to do, i.e. short sale, DIL, repayment plan, modification, etc. This middle step is what most are referring to when someone says they are talking with a loss mit negotiator. Finally, are the back-end people. The back-end analysts and support staff will process the claim trying to minimize the banks (or more likely the servicer) losses on a short sale or whatever the workout was. They also process the incentives they may get for a completed workout, the amount of which is based on what type of workout is completed.

Front-end. Think of the front-end employees as a glorified file clerk (ok not very glorified). They get the packages, sort them making sure no info is missing (which is VERY common) and based on what the package says they want or the front end person's training, it is forwarded to the appropriate person in the middle area (a processor). If info is missing, they try to contact and get the info via phone and mail. If after so long they don't get the required info, the file is closed (also somewhat common). The people in this area have no idea what the options are (with very rare exception), hardly anything about those options and thus cannot tell you anything useful in regards to whether your package is going to be successful. They only know what info is needed and just try to get it. Calling this person is a waste of your time. They will tell you the processor makes the decision on whether they will qualify for a successful workout. The most important thing you can do in the beginning is to make sure you have a COMPLETE package with everything requested the first time. If your package is missing info, it is put aside and the info needed is requested. These people get stacks and stacks of mail and faxes they have to be sorted and put with the correct file. It takes a lot of time. That is time that could have been saved by doing it right the first time. Also, don't forget your hardship letter.

Also, if you just submitted a package and call in to customer service or customer counseling looking for an update, and they tell you this person is the processor, they are wrong. This person is not a processor but is listed as the processor at this point because the file is in their name on the system while they collect the necessary info to get it to a loss mit processor for the next step. Of course most other departments don't' understand anything about this area either. They are just smart enough to look up whose name the file is in. With a bare minimum of thought or instruction, they should know the front-end person is not a processor but a file clerk. But alas, that makes too much sense to work in a bank. I don't think it is too much for a customer service/counseling person to understand the bare minimum about what is going on but at the end of the day, the higher ups just don't understand this. I know. I know. Things like this happening are why so many say the left hand doesn't know what the right hand is doing, especially the bigger the bank. Which is completely true in my view.

Also this person doesn't do just one file at a time. They do 50 at a time so when it is passed to a processor, the actual loss mit processor in the next step could have just been handed 10 or more files. Remember, it takes time to look at them. They are also separated in the process of going to a loss mit processor based on the loan number. If there are say 5 short sale FHA processors, one gets loan numbers 0-2500000000 and so on.

DON'T EVER SEND ANYTHING VIA THE MAIL OR FAX OR EMAIL WITHOUT YOUR LOAN NUMBER ON IT. You would be surprised how many do this. If there is no loan number, the chances of it finding its way into the right file are not good, even at the processor level (level 2) because they get so much paperwork. So unless they happen to have just looked at your file and connect the dots, it will probably be shredded. This means it will have to be resent and of course your file is going nowhere until it is received.

Processor/mitigator level. After the front end receives a complete package, it is forwarded to a processor based on what the bank thinks is the best option or what the homeowner wants BUT will have to qualify for. This is the most complicated step. This is further broken down by loan investor type i.e. FHA, Freddie, FNMA, private mortgages, and loans from the bank's own portfolio. 99% of processors know very little about different areas other than their own little area. A Freddie processor generally will know very little about the guidelines of FHA loans and vice versa (and sometimes not even their own for a while if they are new). Also, each area of the portfolio handles workouts differently. For example a Freddie processor sets up repayment plans, mods, short sales and DILs. But an FHA processor usually only processes one or a few options: i.e. repayment plans or short sales/DIL or modifications only. So if someone is only 3-4 months behind, they are going to be considered for a repayment plan first, then other options. By the same token, if someone just lost their job and has no income, they are going directly to short sales/DIL consideration because retention options are not going to happen in this case.

Which option is pursued is completely based on what the borrower qualifies for. This is derived directly from an analysis of the borrower's financial picture. All the info is put into a spreadsheet and it usually tells them what to do if it isn't obvious. There is very little left to interpretation generally speaking. For instance, if the numbers show the borrower can afford the property, they will not qualify for a short sale no matter what they want. So even if a borrower can't qualify for one option, the package will be passed to another processor if another option may work. So if they talk to the borrower and in their analysis think another option is better or some of the info they gave was wrong or changed, it may be considered for another option. But don't lie thinking you know what they want to hear. It almost always backfires in my experience. If no options are realistic or they have not responded to inquires for info or clarification (again, common) then they are denied and a letter is sent. If something in the borrowers financial picture substantially changes (they get an inheritance for example), they should reapply for assistance.

The processors are juggling a lot of deals and are in various stages of the process with 100 files or so (and sometimes in the 200 range). Don't call them every day when they have told you they will call you when they need more info. I understand you are scared but doing so slows the whole process. Calls like this are one of the big reasons the voice mail was full but I digress. Having said that, not all of them are, lets say, in the right job in my opinion. So don't think I would automatically think they are right.

Back-end. This is more informational as most consultants and homeowners don't speak to people in this area with much frequency. The back end claims analysts try to recoup bank or servicer losses with the investor (i.e. Fannie Mae, FHA or whoever), the mortgage insurance companies (PMI, United Guarantee) or possibly other insurance companies in certain circumstances. They also usually know the most about the whole process because they can see the whole process and then audit the file looking for mistakes or improvements that can be made. They file a claim to lower the loss. And yes, even if money is collected from all sources, the bank is still going to lose money 99% of the time.

Often I hear on forums and many homeowners and consultants think that because a lender has mortgage insurance coverage they won't lose money. This is not true. Just as an FYI, when a mortgage insurance company pays a full claim, they only cover 20% of the loss on a claim. That is considered full coverage. And they rarely pay the full amount.
So after collecting as much as possible, the analyst moves the money between various accounts (delinquent interest, funds received, etc.) to zero out a loan. After these people do their part, the file is passed to others in the back end who close it and file it away, again somewhat depending on who the investor is. Again, for the most part, a person helping a borrower or a borrower will rarely need to speak to anyone in this area of the process. Occasionally they will get 1099 related questions, credit reporting issue questions, etc. This area has the unique position which allows them to have minimum borrower contact but also understand and see the whole process because only the people in this area and the big cheeses see the final numbers and what our real losses are and why. In order to explain it to the executives they have to know a lot about all the processes and how they affect what we collect on a claim and mistakes that were made in a workout and how to correct them. And when mistakes are made, it costs the bank/servicer big money and as most can guess, most mistakes are preventable but I digress again.

For example, I had a co-worker who was doing a workout but forgot to put the foreclosure sale on hold even though they were approved for a workout. OOPS. Bank has to buy home back from investor who bought it at the sale. Investor got a good deal. Bank writes large check (over 200k) and processor assumes the position and has a nice "conversation" with some higher ups. The investor netted almost 70k. Touché. The moral is stuff happens and it almost never works out in the banks favor.

Another thing to remember is when a loan goes delinquent beyond a certain time frame, a lot of the investors who actually hold the paper (Freddie, fnma, etc.) require the servicer to repurchase that loan from the big pool of loans it was originally part of. There are many different types of pools but in many of them, the servicer is required to make the investor whole when a loan goes bad and wire them the money for the principal and interest owed. Exactly how it is decided how all the loan pools work and how they are negotiated as to when the servicer is on the hook is not something I know much about. But this forced repurchase is why the bank/servicer is the one filing the claims with the investor and the MI (mortgage insurance companies). It is curious to me exactly why we are forced to repurchase, file a claim with the investor who we just made whole and then they get to decide how much they will reimburse us. Doesn't seem like the easiest way to handle it but again I digress. Remember as mentioned above, just because a loan has mortgage insurance coverage, DOESN'T mean the bank is not going to lose a lot of money which is a common misconception.

Also, my experience is in conventional loan servicing only. I have no real experience in sub prime loans. But I imagine they are handled pretty similarly. Remember, it is all about the guidelines the servicer has to follow, not what they want to do as they are not making things up on a case-by-case basis as they go. As I am sure you have guessed, this is just the tip of the iceberg here. I hope you find a peek into "the dark side" helpful. I am far from an expert myself.

Good investing all. I wish it could have been shorter.

Mike C

Great information, Mike.

Did you ever do NPV calculations to determine whether to modify or foreclose when you worked in loss mitigation? Or do they present the information to the investor and allow them to decide?

The August 15, 2007 ASF Guidelines are interesting because they're attempting to standardize the method in which the servicer can determine the best way to act in the best interest of the investor in regards to loan modifiations. [best interest of the investor is being defined as all investors regardless of class]

They suggest a NPV calculations comparing the foreclosure cost to the modification cost. Whichever presents the highest NPV is the desirable path the servicer should pursue.

where the cost of modification is compared to the foreclosure, and whichever has the hightest NPV is the direction the servicer should take.

I wonder if this will free up the loss mitigation people enough to crank out these modifications faster and give some people some relief.

Very informative Mike. How long have you been with that institution? Were these guidelines/procedures/protocols you mention always in place or did you find that many of these rules were made up as they "went along" so to speak, to adjust to the volume that is occurring in this current marketplace.....?

Greg,

As far as to whether the servicer uses NPV calcs to determine whether to foreclosure or workout is concerned, the answer is no for the most part. They don't consider it. If the borrower can show affordability of the home, they will keep them in it. They will always keep the borrower in the home if at all possible. They basically put the borrower's info into a spreadsheet that tells them what options they can qualify for and go from there. If they qualify for something, whether they present the info to the investor is entirely up to the investor type. For example, Freddie has people in loss mit shops that eventually become certified in how Freddie thinks. Once certified, they have more authority to do a workout without providing every detail to the investor as is normally required with them.

I have no familiarity with the ASF guidelines but the methods they use to determine eligibility for workout options is already pretty simple and pretty easy to understand. It wouldn't change much from loss mit shop to loss mit shop as all the shops are following the same investor guidelines the investor has set for all servicers.

Fore this reason I don't think any more standardization would change things much. Some processors do very high volume. I have seen upwards of 110 mods a month for one processor, not counting other workout options such as short sales or repayment plans. The supposed expected workload of a processor was 75 files officially. But file counts over 200 are common and that was in 2006.

Yes, the negotiator would be dealing with the investor directly, again depending on the investor, as not all of them require as much hand holding as others. I have never dealt in reverse mortgages but in general yes, when they are saying they need to get it approved, they mean the investor has to approve it. They use the guidelines to decide whether to involve the investor. If they meet the guidelines, they would forward it to the investor for approval. But again, this varies from investor to investor how much authority they give the servicer. This is also almost always done loan by loan, which is why the process is so slow.

As to the situation in which you could not modify because of a specific loan pool with different classes and have no guidance that would be pretty rare. The part I mean as rare is having no guidance would be pretty rare. Loan pools of different classes obviously would be quite common. If the loan in the pool won't allow a mod (which is pretty common), the servicer will have to repurchase the loan into their own portfolio from the investor and do the workout and then it is repackaged. How it is repackaged I don't know. I don't know if it goes back into the original pool after the workout and the loan is performing or is just repackaged into a new pool. But everything discussed in this paragraph probably would not be known by most processors/negotiators. They would not be involved in any of this other than possibly ordering the loan repurchase, again, based on their guidelines for that investor. So for the purposes of helping a homeowner worrying about the loan pool isn't something I would worry about.

Also, the investor can pretty much at any time and for it seems like almost any reason, make the servicer repurchase the loan and keep it on their books workout or not. It seems pretty arbitrary but I don't know the whole story in all cases.

I wish there were easy answers but every investor handles everything differently. And almost all processors will know very little about how other investors handle things so if you ask and they say they don't know, they probably rarely do.

Good luck

Mike C

Greg,

Like I said, they don't make a separate NPV calculation, other than the info they input into the spreadsheet to decide what to do. If the borrower can show affordability and a plan, they don't foreclose. They would rather look understanding and lose money than like a heartless company. If they have a reasonable chance to be successful staying in the home, they do a workout option. Period. Banks make money lending and servicing loans. They will do anything to avoid adding a loan to their REO portfolio. Because many cannot be saved.

Obama's plans are beyond stupid and a bad idea for the industry in general. He has no idea what he would be doing if they allow BK courts to unilaterally change contracts (which I hope and don't think will happen but we will see). Yes, anyone with a minimum of forethought will fight this idea tooth and nail for many reasons. Of course senior investors will fight this. Let me list a couple. First, the US used to be a place where the laws of the land protected those who invested here. That is unfortunately changing. What I mean is if I hold a pool of loans and now some BK court can unilaterally change contract law and make a legally binding contract between two parties null and void, it sets a very bad precedent about the future of business here, especially to help out someone who was irresponsible in getting the loan in the first place and thinks they deserve to own a home. They do IF they can afford it.

If this is allowed to happen foreign investors (and US investors) will be much more reluctant to invest money in the US if we will change the rules of business and contract law just to protect those too stupid to protect themselves. And if they do invest, they will require a massive investment premium for the additional risk they are taking now that the US thinks it is in the business of bailing out the fools. The end result will be much higher borrowing costs for everyone, which is never a good thing.

This is just the beginning. What is happening here now is a disgrace to our founding fathers and a country that used to reward those who strived to achieve instead of subsidize all those who think they are entitled to a good life without any effort.

Good investing

Mike C