The nation's second largest mortgage company says early workouts are central to its game plan for 2011.
This ""nip it in the bud"" mindset can be key to getting in front of delinquencies before they turn into lost-cause foreclosures, and ""Freddie Mac"":http://www.freddiemac.com says it's making changes to the way it evaluates the performance of mortgage servicers in order to ensure problem loans are tackled early on and increase the odds of getting borrowers back to performing status.
[IMAGE] In a ""blog post"":http://www.freddiemac.com/news/blog/anthony_renzi/20110309_early_workouts_central_to_game_plan.html?intcmp=FM120110314EPB, Anthony Renzi, EVP of Virginia-based Freddie Mac, explained that the GSE is retooling its 15-year-old Servicer Performance Profile metrics to create a new balanced scorecard that will motivate servicers to make very early contact when borrowers are delinquent.
""How early? I'm talking about making contact by the third day of delinquency,"" Renzi said.
That's the ideal scenario, but the unequivocal line in the sand is being drawn at within 60 days of the first missed payment.
Renzi says early intervention will allow Freddie Mac to streamline its loan workout programs and processes so they are easier for servicers to implement and borrowers to understand.
As a result, he says, servicers will have the time to find out enough about the borrower's financial challenge and the tools to diagnose the right foreclosure alternative, or in a situation where a solution cannot be found, help the borrower achieve a graceful exit and minimize the GSE's credit losses.
To accomplish this, Freddie Mac is making two fundamental shifts to the approach used in its servicer scorecard.
First, the GSE is changing the yardstick for measuring how well servicers manage delinquent borrowers, Renzi[COLUMN_BREAK]
explained. The new metrics will emphasize ""the human connection"" Ã¢â‚¬" early and frequent borrower contact to keep the loans current or determine the issues within the first 30 days of default, he said.
Renzi noted that statistical analysis consistently shows that the longer the delinquency, the lower the odds of a successful workout.
Freddie is also replacing broad measures, like a servicer's ratio of workouts to foreclosed properties, with more emphasis on activities that keep 30-day delinquent loans from becoming 60-day or 90-day delinquent loans, such as workouts and collections. Renzi says the GSE will be focusing heavily on ""roll rates,"" i.e. whether a loan moves from its delinquency bucket to a workout or whether it progresses to a later stage of delinquency.
""Over 60 percent of the emphasis in our new scorecard will be based on how servicers organize themselves to support early borrower contact and get to a foreclosure alternative,"" Renzi said. ""[F]or example, by ensuring their call centers, email/chat centers, and mail response centers are adequately staffed and supervised so workflow patterns are tightly controlled.""
The remaining 40 percent of the scorecard, Renzi said, will be related to data integrity, default timeline management, and other administrative processes.
The second component of Freddie Mac's new approach is to sit down with servicers and set individualized objectives for achieving foreclosure alternative goals, Renzi said. Once these goals are set, he added, Freddie will review each servicer's files to see how they used their people, processes, and systems to achieve their stated objectives.
""As perhaps the single most important element of our new, balanced approach, the file reviews are where the right questions are asked,"" Renzi explained. ""Did they work to avoid foreclosures or, if a foreclosure referral occurred, give the borrower time to take action that would avoid the final foreclosure sale? If not what are the issues and what will it take to achieve our mutual goals?""
Renzi likened the GSE's strategy to a football team going over the post-game tapes. ""At this stage of the game we all know the stakes,"" he said. ""More successful early contacts can increase the odds for successful workouts, more stable communities, and fewer losses to Freddie Mac Ã¢â‚¬" and by extension, the taxpayers who support our work.""
A spokesperson for Freddie Mac explained that the new servicer scorecard is scheduled to be rolled out by the end of the year.