For those of us in the industry, we’ve seen our fair share of housing programs, particularly since the mortgage crisis. HAMP, HARP, HHF, HAFA—it’s an alphabet soup of different programs designed to provide support and options to a borrower in distress. Many of these programs have provided much-needed help to consumers while bolstering the market during a period of uncertainty. But these programs come with guidelines and qualifications and there are certain loans that just cannot be modified using their specific criteria.
As a result, many agencies have found themselves carrying distressed portfolios for long periods of time, unable to find solutions that allow both the homeowner and the agency to move forward.
Dumping the Distressed
For a variety of reasons we all understand, agencies do not want to hold these portfolios any longer. The loans have been delinquent for years, on average, and the borrowers are typically exhausted by a variety of loss mitigation efforts and many are in foreclosure. So what’s an agency to do?
Sell, of course. And who can blame them?
But the sales of these pools has sparked controversy throughout the industry—and because of the purchasers, not necessarily the sale itself. Many of these pools are sold to private investors, parties who, according to critics, have their own economic incentives that far overshadow helping the homeowner or stabilizing the neighborhood. The outcry has been so loud that agencies like Freddie Mac have added requirements to the transactions designed to improve outcomes for both borrowers and communities. They also divide the pools into groupings that target participation by smaller investors, such as nonprofits.
There is nothing wrong with these requirements. In fact, they’re good for the industry, the communities they support, and the borrower. Many times, modifications are successful because the borrower truly wants to remain in their home and has the support of their community. However, these requirements send a negative—and inaccurate—message that private investors are looking for a fast foreclosure.
Not All Investors Are Created Equal
I don’t think anyone would argue that private investors aren’t financially motivated. It’s how their business works. But to assume that fiscal success and foreclosure prevention cannot be synonymous would be inaccurate. Private investors who work with special servicers on their portfolio are able to offer broader options for borrowers than, say, a nonprofit operating with limited capital and capacity. The goal of an investor is simple—maximize the return on their investment. One could argue that with such a clear goal in mind, there is little room to be distracted by political or regional factors that can, at times, slow progress.
At Selene Finance, we service many pools that were previously deemed too challenging by other servicers. Despite its best efforts, the previous servicer had been unable to find a solution that would keep a borrower in their home or let them responsibly leave the home, if that’s their choice.
These loans require a different level of servicing that can best be provided by a special servicer with expertise in distressed loans. We are consistently working through scenarios where the agency’s loss mitigation waterfall has been exhausted and foreclosure appears to be the only option.
For example, Selene was working on a loan that was part of HUD’s Distressed Asset Stabilization Program (DASP) portfolio transfer from a private investor. The borrower’s home had a value that was well below what they owed, and, due to a string of unfortunate incidents, they had filed for bankruptcy. Previous servicers, bound by the HUD waterfall, had told them they couldn’t get a modification based on their income. However, once Selene received the loan, we were able to work with the private investor to restructure the loan and configure a modification that dropped their monthly payment by more than $800. Through creative strategies, we waived late fees and deferred past due, escrow, advances, and even UPB.
If the borrower continues to keep their loan current, without any late payments over the first 12 months, 1/3 of their deferred balance will be waived by the investor. Even further, if they keep the loan current for 24 months, another third will be waived. And this will continue, so the borrower could end up with a zero deferred balance and an LTV that is more in line with their property value.
Now we have a happy borrower in their home and a happy investor receiving regular payments.
The flexibility provided to special servicers by a private investor is the key differentiator in these scenarios. Purchasing the pool at a discount allows for special se rvicers to offer a different set of options that can better suit the borrower, while still meeting the financial goals of the investor. Contrary to criticism, private investors don’t push borrowers to a fast foreclosure. In fact, most of the private investors we work with have a cash flow strategy, as opposed to a liquidation strategy. A cash flow strategy can include, for example, modifications and repayment plans.
As a result, we’re able to get creative in our outreach strategy. We can send unique mailers and letters in colored envelopes or even small tokens to get in front of borrowers who are otherwise exhausted from the process. We’ve found that taking a different approach can build trust and participation from even the most disengaged borrower. Many of these tactics would be prohibitively expensive for loans in pools owned by agencies, or even smaller nonprofits and investors. So dividing the pools into groupings that best target different purchasers ultimately benefits the borrowers and their community, since they are sold to the right investor—one who is armed with a specific set of unique tools to move them forward.
At Selene, we’re proud of the work we do to find sustainable solutions that best suit the borrower and the investor. Since January 2015, 50 percent of the actions we’ve taken have been workouts—a notable result for pools of loans that were otherwise considered exhausted. Workouts include a variety of results such as modifications, short sales, deed-in-lieu, and reinstatements. We also see only a 17.2 percent modification redefault rate after 12 months. This illustrates our ability to find the right alternative solution that works long-term for a borrower who’s facing a unique set of challenges.
Playing an Important Role
I can understand the concern of the critics who believe private investors are looking for a quick profit. However, I feel strongly that concern is misguided—and not only in my role as the CEO of a special servicer who admittedly gets much of our volume from these agency trades. I believe that private investors play an important role in finding sustainable solutions for borrowers and stabilizing neighborhoods facing blight and distress.
But as with anything, balance is important. Through a cooperative partnership with each of the participants—agencies, investors, servicers, local organizations, and nonprofits—I believe we’ll continue to see positive results. Despite different goals, each of the groups involved in these sales play an important role. Maintaining homeownership and stable neighborhoods and providing borrowers with sustainable options are central to the balance of our industry overall, and we can all help it continue to succeed.
In it for the Long Haul
As the new administration takes office, change is inevitable. For now, however, it appears these sales will continue despite the critics. The variety of purchasers remains important, as we’ve seen varying outcomes from different pools. It’s clear that the agencies cannot continue to hold these loans, and special servicers are uniquely positioned—with the support of their investors—to move the loans to the next stage, whether that is through a modification or a responsible exit.
For those of us who have been in the industry for a while, we’ve seen lots of change. Critics can become supporters and advocates can become detractors. For now, it’s important to keep clear goals in mind: Support the borrower and the neighborhood and improve the liquidity of the owner’s assets. I think these are goals we can all support, and I look forward to continuing to make a positive impact on our industry.