Foreclosure alternatives aid owners, servicers

Innovations in mortgage servicing during the last decade have significantly helped keep families of all income levels in their homes after a mortgage default has occurred, according to a recently released study by Freddie Mac.

In addition, according to a July 16 Freddie Mac news release, the study found that the earlier a financially stressed borrower starts a repayment plan or negotiates a loan modification, the more likely that borrower is to keep the home.

The study, by Freddie Mac Deputy Chief Economist Amy Crews Cutts and George Washington University Professor Richard Green, found that home-retention workouts such as repayment plans and loan modifications are very effective at keeping borrowers in their homes.

Study results also showed that newly delinquent borrowers who previously went through a loan modification were less likely to lose their homes than those who were delinquent for the first time. A loan modification is a change in one or more terms in the borrower's loan that allows the loan to be reinstated and results in a payment the borrower can afford.

Mortgage servicing is the collection of mortgage payments from borrowers and the disbursement of those payments to lenders, and in some cases to local governments and insurers to pay for property taxes and hazard insurance. In the event of nonpayment by borrowers, mortgage servicers are responsible for collections and loss mitigation efforts, and for starting foreclosure.

"The study validates that repayment plans work well, regardless of the income level of the homeowner," said Cutts. "We found that repayment plans lower the probability of home loss by 80 percent among all borrowers and by 68 percent among low- to moderate-income borrowers." Cutts added that for servicers, foreclosure alternatives cost less than acquiring the actual property, which may carry legal and home repair costs. For borrowers, foreclosure alternatives help them keep their homes and avoid the trauma and financial hardships of losing a home.

Mortgage servicing innovations such as automated reporting, remitting and tracking, automated voice response systems and credit scoring-based servicing tools, including Freddie Mac's EarlyIndicator, have proven beneficial for borrowers and servicers. EarlyIndicator identifies distressed loans that would benefit from early intervention by the servicer.

Mortgage loan servicing costs have fallen dramatically in the past 10 years with the adoption of more efficient technology.

In the early 1990s, costs ran about $120 per loan, compared to an average of $79 per loan in 2001.

"Servicing innovations have had a profound impact on the successful resolution of delinquent loans, similar to the impact that automated underwriting has had on helping more people become homeowners," Cutts said.

Freddie Mac has pursued foreclosure alternatives for years. Wherever possible, Freddie Mac prefers to avoid foreclosure and works with mortgage servicers to find solutions that keep people in their homes. Freddie Mac monetarily rewards mortgage servicers for doing workouts and has paid out more than $20 million to servicers in incentive bonuses since 1996. Freddie Mac servicers serviced $1 trillion worth of mortgages in 2003.

Since 2000, servicers working with Freddie Mac have used Freddie Mac's loss mitigation plans to keep more than 145,000 families who were having financial difficulty in their homes.

Cutts and Green studied almost 148,000 loans owned by Freddie Mac between January and September 2001, comparing loans that were in various stages of delinquency to loans that were newly entered into repayment plans. They followed the performance of each loan for 18 months.

Freddie Mac is a stockholder-owned corporation established by Congress in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets.