What happens when a borrower gets behind
A new report looking at delinquent subprime mortgages in Maryland and nearby states finds that foreclosure is still the go-to solution for lenders -- or at least it was through the middle of last year, when the report's dataset ends.
Loss mitigation and loan modification were "much less frequently pursued" than foreclosure, says the report, prepared for the Baltimore Homeownership Preservation Coalition.
Why? Much has been written about that. The report's authors, J. Michael Collins of the University of Wisconsin-Madison and Christopher E. Herbert of Abt Associates Inc., note that financial incentives -- and disincentives -- are one of the barriers.
Servicers, they say, "are reimbursed by investors for missed payments and actions taken in pursuit of a foreclosure, but not for costs associated with loss mitigation activities."
In recognition of these costs, Fannie Mae, Freddie Mac, and the Federal Housing Administration have long offered servicers incentive payments to encourage servicers to pursue these remedies, but investors in private label mortgage backed securities do not provide such incentives. The lack of income from loss mitigation activities may also lie behind the fact that many servicers lack the capacity to handle the workload associated with elevated requests for loan workouts. Absent incentive payments, servicers do not have a financial incentive for adding to their organizational capacity for these functions.
So: What about the servicers who signed an agreement with the state to "to create a streamlined and transparent loss mitigation process for distressed Maryland homeowners"?
But whether that's averting foreclosure or just postponing it isn't clear yet. The signs seem to be pointing to the latter.