A recent report by Reuters discusses efforts undertaken by loan servicers to avert foreclosing on delinquent properties.

Mortgage servicers offer help to avert foreclosures

Mounting defaults on loans made to the riskiest borrowers has mortgage servicers coming up with financing alternatives to keep buyers in their homes rather than risk foreclosure.

Concerns that a growing number of resets on adjustable rate mortgages may exacerbate an already dire situation in the subprime mortgage market has servicers offering to work with consumers on modifying their loans.

"When an ARM resets, typically, the average payment increase is 20 to 30 percent. We're in a much better situation if we're able to restructure the debt," said Larry Litton Jr., chief executive officer at Litton Loan Servicing in Houston. "You're not going to be able to collect your way out of the problem by just hiring a bunch of people to collect."

Servicers collect payments on loans, distribute collections to investors or owners of the assets and administer the assets upon a borrower's failure to make payments.

Subprime mortgage servicers are facing challenges as home prices stall, mortgage payments and delinquencies rise, and tighter lending nearly guarantee those with the weakest credit histories will default.

"Whenever we have to foreclose and take a property back we end up losing 40 to 50 cents on the dollar. I'd rather take less money on an interest rate basis from the borrower than I would have having to take the property back," said Litton, whose firm services $60 billion of subprime and Alt-A loans, which are a step below "prime" in credit quality.

Delinquencies on subprime adjustable rate loans jumped to 14.44 percent in the fourth quarter of 2006 from 13.22 percent in the prior quarter, according to the Mortgage Bankers Association

In efforts to mitigate defaults and foreclosures, mortgage servicers have been stepping up borrower contact campaigns, adjusting payment plans, and setting up local task forces in areas hardest hit, Standard & Poor's said.

Mike Gutierrez, who heads S&P's U.S. Servicer Evaluations group, said most mortgage servicers in the subprime arena are acting assertively and with the goal of preserving homeownership whenever possible.

"Based on our discussions with servicing professionals, ... we are confident that servicers are taking proactive measures to battle the current wave of early payment defaults," Gutierrez said.

Litton said if payments rise beyond a homeowner's ability to afford them, the company is willing to restructure the debt.

Measures may include extending out the first ARM adjustment date by a few years, giving the borrower some time for their financial situation to improve or allowing them to get into a position to refinance.

In a situation where a borrower has suffered a reduction in income or some other serious life event, Litton said the company may waive part of the past due amount, waive some of the principal if the borrower is located in a market where property values have gone down, or lower the rate.

Minneapolis-based GMAC ResCap, a unit of GMAC Financial Services, also works with borrowers struggling to hang onto their homes. The company considers refinancing the loan, modifying a loan by adjusting the interest rate or by extending the loan terms. GMAC ResCap provides mortgage servicing for 3 million homeowners, managing a total portfolio equal to $424 billion of unpaid principal balance.

The challenging environment in the subprime mortgage market has pressured some servicer credit ratings. For example, Fitch Ratings on Tuesday said it may cut NovaStar Financial unit NovaStar Mortgage's residential primary servicer rating, partly due to uncertainties regarding the company's profitability.

"Servicers who do not have either a diverse product mix or financially strong resources could ultimately see their operations adversely affected, which may result in staff layoffs, loss of new loan volume and higher default levels," said senior director Mary Kelsch at Fitch.

Financial stress at mortgage originators and servicers can adversely affect securitizations, pools of subprime mortgage loans sold as securities.

"If I were an investor I'd want to know how solid a servicer is and whether they are able to establish the right resources to handle the performance and the issues of the loans," said Patrick Tadie, managing director at Bank of New York.

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