A Servant’s Heart

Defaulting on payments is inevitable, but foreclosure and bankruptcy don’t have to be.

Luckily their loan officer intervened after that first delinquent payment and they had a frank conversation about how to get back on track. The lender never had to initiate steps to protect its investment and the family remained in their home for another 25 years. 

High interest rates coupled with inflation mean lenders can expect potential financial losses now and in the years to come. Instead of preparing for an increase in foreclosures, they can consider different options available to their borrowers before the crises occur. 

TECH SOLUTIONS

One company lessening the burden is loss mitigation technology provider WaterfallCalc, which came up with a new tool allowing borrowers to request assistance from their mobile phone or computer. It also allows lenders and servicers to calculate the appropriate loss mitigation option for each individual loan case based on insurer and agency requirements.

“Borrowers, because it’s too arduous or too difficult, wait until just before their foreclosure sale to decide OK, I’ve got to try and save my house. The easier you make it for them, the less delinquent they are or the less likely they are to use up their partial claim or deferral amount in order to get assistance to bring their loan current,” says WaterfallCalc founder Donna Schmidt. 

Borrowers can submit proof that they need help, such as a pay stub, by uploading a photo of it along with their application, to this program.

The company’s analysis of defaulting borrowers at the height of the covid-19 pandemic found that 53% did not actually need the big reduction in their mortgage payment.

“What they needed was to understand their other bills are their problem,” Schmidt explains. “It turned servicers almost into counselors.”

If mortgage pros don’t take that approach now, she adds, they’re going to see heavy re-defaults. 

“When a borrower does fall delinquent, it’s going to be extremely important to make it as easy as possible for them to request assistance.” 

Watch it on The Interest:A Servant’s Heart

She suggests lenders and servicers use monthly billing statements to communicate to borrowers that there is help available. 

ASSISTANCE and EDUCATION

FHA’s National Servicing Center (NSC) offers a variety of loss mitigation programs to assist those it insures who are facing financial hardship. That includes forbearances, loan modifications, partial claims, deferrals and pre-foreclosure sales. The other GSEs have similar programs available. 

“Foreclosure should almost never be an option,” says Scott Schang, partner at BuyWise Mortgage and founder of FindMyWayHome.com. “They should always look at trying to sell the home and preserve that equity, which gets eaten up by penalties and interest and attorneys’ fees the lender is allowed to tack on to the transaction. A consumer with equity could literally save $80- to $100,000 dollars, depending on what market they’re in, by just selling the home.”

One might detect that Schang isn’t in this business for the fame or fortune. 

“I’m the guy that spends 45 minutes to an hour on the phone with a customer that I can’t help just because I want to put him in the right situation. And that goes against everything that every sales coach has ever taught,” he explains. “Don’t waste your time on people that you can’t make money off of. I just don’t see it that way. I see it as an opportunity to earn their trust and get referrals. And I think it’s good karma. As loan officers, we’re professional problem solvers. It’s okay if we don’t make money today. It goes into your karmic marketing bank and you can withdraw from that one, two, three, four, five years in the future.”

Schang became a mortgage loan officer 23 years ago, then a branch manager and broker-owner. Since 2007, he’s been a blogger. With around 30,000 unique visitors each month, FindMyWayHome.com simplifies complicated mortgage and real estate topics to help consumers make smarter financial decisions. 

“Listen, when hardship happens, you have choices to make. And when you know what the light looks like at the other end of the tunnel, it’s easier to make those choices so that you know what you’re in store for,” he says. “This is really an opportunity to make sure that people understand all of their options. You can’t necessarily fix somebody’s financial predicament, but you can educate them on how to navigate through as gracefully as possible, and give them hope that if you do these things the right way, this is when you can become a homeowner again.”

Filing for bankruptcy doesn’t eliminate secured debt like mortgages. It suspends collection efforts until further notice. Schang calls this approach to financial turmoil “the easy button.”

“The consumer just wants a breather, and bankruptcy is the breather,” he says. “There’s a lot of misinformation about bankruptcy. Back in the day, most of those bankruptcy attorneys were ambulance chasers. They would tell people that you could save your home if you file bankruptcy. And that’s simply not the case. It suspends the payments while they’re in the process of bankruptcy, but the lender still has the right to foreclose on that home once the bankruptcy is discharged. And a lot of consumers don’t know that.” 

Fannie Mae, Freddie Mac, FHA, USDA and VA loans are all treated differently, depending on what mortgage activity is taking place. 

“How the home is treated, whether it’s included in bankruptcy or not, and when the foreclosure happened in relation to the bankruptcy - all of these things affect the timelines for consumers to be able to get back into homes. And that’s ultimately the goal of my advocacy,” Schang says.

A deed-in-lieu of foreclosure, for example, saves lenders the cost of hiring an attorney to evict the homeowner, while a short sale doesn’t really benefit anybody, except maybe the buyer. If there is a notice of default on a property and it is sold, the seller can potentially make another home purchase in one year. If that home were to fall into foreclosure, they would be looking at a minimum three-year wait.

“Foreclosure, bankruptcy and short sale all have similar timelines for waiting periods, except for Fannie Mae and Freddie Mac,” Schang says. “If you just have a foreclosure without bankruptcy, it’s seven years. But if it’s a short sale or a deed-in-lieu, it’s a four-year wait.”

In the case of deed-in-lieu, he adds, many lenders actually pay borrowers to vacate the property and rent someplace else. 

“There’s an agreement that the consumer’s gonna leave the home in good condition. And that’s basically it. The bank takes the house back, they fix it up, they send it to a real estate agent or put it in auction and they resell the property to recoup their costs.”

WHAT ARE THE STATS?

The expiration of COVID-era government initiatives such as foreclosure moratoriums and loan forbearance have left many homeowners in a bad spot. 

As mortgage veterans might recall, foreclosure filings started to tick upwards by more than 10% per quarter in the years leading up to the housing market crash of 2008.

However, analysts contend, today’s market is more of a sign of the times than impending doom. 

“We’re expecting a 20% increase in defaults just with our current clients,” Schmidt says of the coming months. “A lot of these people through no fault of their own are all of a sudden going to be delinquent and they’re going to need assistance and the assistance is somewhat limited. It’s going to be very interesting to see what happens in the next six months.”

Property data analyst ATTOM’s Midyear 2023 U.S. Foreclosure Market Report showed a total of 185,580 U.S. properties with foreclosure filings in the first six months of 2023. That included default notices, scheduled auctions and bank repossessions.

That figure was up 13% year over year, but a 185% increase from the same time period in 2021, when filings were at historic lows.

ATTOM’s latest foreclosure market analysis showed a significant uptick in Q3 2023, with a steep quarterly and annual rise of foreclosure rates. The report highlighted a 28% surge from the previous quarter, totaling 124,539 U.S. properties with foreclosure filings. This represents a 34% increase from the same period last year. Lenders started foreclosure on 68,961 U.S. properties in Q3 2023, up 3% YOY, nearly reaching pre-pandemic levels. 

As for those who have taken advantage of less harmful options, Schmidt is counting the ways. 

“We’ve been seeing an increasingly high number of partial claims as opposed to modifications or deferrals,” she reports. “For borrowers who need assistance with a lower payment, there’s a combo where you take a partial claim or deferral and add it to a modification. What we’re seeing because of the higher interest rates is that we’re using more and more of the allowable partial claim or deferral money - which is usually capped at about 30% of the UPB (unpaid principal balance). We’re using it up in one shot to just get a borrower a lower payment. It’s going to be incumbent on servicers to really work hard in trying to communicate to their borrowers you’ve got to make your mortgage your priority because this could be the only assistance you’ll get.”

EDUCATING LOs & CONSUMERS

Faith Schwartz, founder, CEO and president of Housing Finance Strategies, founded the HOPE NOW alliance in 2007 to get loan servicers and struggling borrowers facing each other to table-talk solutions. During an interview with NMP Magazine at the start of the pandemic, she recalled how these events drove home the fact that there is a family behind every mortgage. The alliance claims that as of 2014, it had resolved more than two million cases. Schwartz could not be reached by the writing of this article, but the initiative is currently working with the FHFA and the enterprises on mortgage relief programs, according to its website.

“I think advocacy marketing is very, very underrated,” Schang points out. “Just build your network and build your authority and build your reputation as somebody who actually cares about people.”

Consumers get much of their information on the internet nowadays, which is where he has positioned himself as the go-to mortgage guru. 

“(Fintech) has completely empowered the consumer. The consumer has all of the control in the decision-making process now. People don’t call salespeople for answers anymore. They do Google searches, they watch YouTube videos, they go on social media, they follow trending topics, and they look up hashtags. It’s silly to me to think that we should behave in a way that doesn’t invite and accommodate how we shop for information online to make decisions.”

Schang encourages LOs to share stories of borrowers they’ve helped through unique situations. Chances are, there is someone else out there in a different ocean, on the same boat. 

“I think if you’re the source of the education,” he says, “you empower that consumer and you earn their trust. And when you earn their trust, you have a chance to earn their business.”

Before he stopped originating loans, he would regularly hear from people he had previously engaged with on the blog who were in a position to buy again. 

This is turning the phrase “return on investment” into “return on engagement.”

“I think if you’re in a market where you’re seeing foreclosures increase,” Schang adds, “there’s a really good opportunity to collaborate with real estate professionals in the space and create education and awareness efforts. If you can head off a foreclosure and turn it into a listing for a real estate agent, you build and deepen the relationship with that real estate agent. And I think that just leads to business for all of us.”