Alternatives to Foreclosure: An Industry Dialogue

Foreclosure doesn’t hurt just homeowners-it comes as a loss to investors, servicers, and insurers.

At the Distressed Asset Roundtable and Exchange (DARE) in New York City Tuesday, the movers and shakers of the default servicing and real estate investment communities tackled the always topical issue of following through on the most advantageous alternatives to foreclosure, from modifications and refinances to short sales.

But throughout the course of the discussion, one especially enlightening topic kept surfacing: What prevents these seemingly sound alternatives from seeing success?

According to Kevin Kanouff of special servicer Statebridge Company, “The reality is most of these troubled loans are going to go to foreclosure.”

He attributes that reality to 1) borrowers’ unwillingness to work with their lender or servicer, 2) borrower characteristics, for example he says a lot of the time nowadays, homeowners are so far underwater that they don’t qualify for a modification or refinance, and 3) lastly, the reason he called the most disquieting, is that investors’ mindset is foreclosure-centric.

Whether it’s the investor themselves or the servicer on their behalf, Kanouff said, their position is “I just want to get this under-performing loan out of my portfolio – just send it through foreclosure and get rid of it.”

Industry veteran Nick Bratsafolis agrees. “Why forgive the debt and continue to hold onto that risk?” Bratsafolis said.

John Doonan, of the New England-based law firm Doonan, Graves & Longoria, LLC, concurred that the easiest route to most investors for cutting their losses is foreclosure, especially given the slim chance that if they concede to a loan modification, the homeowner will make good and maintain a current status to bring the asset back to “performing.”

Even under Chapter 13 bankruptcy filings, the truth is re-worked mortgages fail, Doonan said. He cited statistics from Massachusetts, where the failure rate for Chapter 13 workout solutions is 90 percent.

According to Jay Loeb, VP and principal owner of National Creditors Connection, Inc. (NCCI), which specializes in at-risk borrower contact, behind those high redefault rates, as well as non-communication with servicers, rests borrower psyche.

Loeb says his company routinely resorts to literal door-knocking to get face-to-face with delinquent homeowners and prod them to pick up communication with their servicer and devise a suitable alternative. He says once they’re actually in front of the borrower, it’s much easier to grease the wheels and get the process moving.

Quite often, Loeb said, there’s a disconnect between the borrower’s definition of “engagement” and the servicer’s. Many times the homeowner thinks they are actively working with the servicer to avoid foreclosure, while the servicer sees that the homeowner has failed to send in a specified document and interprets that neglect as non-cooperation and a botched attempt at foreclosure prevention.

A second reason for that “neglect” on the homeowner’s part, Loeb said, is trepidation about turning over financial documents, which may not match their original claims of income and the like.

Kanouff says there is a risk to being “too rigid” the second time around, when writing a modified mortgage. “When we’re not rigid on workouts, the success rate is higher,” Kanouff said. “The results are better for everyone involved if we make it a little bit easier on the borrower and find a program that will really work.”

Kanouff added that there’s a real benefit to customizing workouts for individual cases. “The success rate falters when servicers are too formulaic,” Kanouff said.

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