Expert Insights: Maximizing Loss Mitigation Options

This piece originally appeared in the January 2024 edition of MortgagePoint magazine, online now.

Donna Schmidt is the Managing Director and Founder of DLS Servicing, a provider of loss mitigation support services, default servicing consulting, training, and technology for mortgage servicers. A seasoned professional with four decades of leadership experience in the mortgage industry, she is a sought-after authority on loss mitigation compliance. Donna is also the co-Founder of WaterfallCalc, an online loss mitigation decision and calculation tool that enables servicers to streamline loss mitigation calculations while ensuring investor and regulatory compliance.

Q: How do servicers know the loss mitigation requirements for a given borrower when that borrower defaults?
It’s the servicer’s responsibility to stay up to date with the guidelines and rules for each type of loan they manage in their portfolio. For handling borrower defaults, the requirements can vary widely de[1]pending on whether the loan is backed by the FHA, VA, USDA, or Fannie Mae and Freddie Mac, or was originated by a non-agency lender. Ideally, servicers should have quality control processes and compliance checks in place to ensure that their loss mitigation strategy is in alignment with the relevant agency or investor requirements.

Q: That seems like a lot of time involved; does that eat into profits?
The time and resources required to stay updated on various loan types and their corresponding loss mitigation strategies can indeed eat into profits, but smaller servicers are impacted the most. Large national servicing institutions typically have the volume to divide these overhead costs. But even for them, keeping staff fully educated about frequent regulatory changes can be both time-consuming and financially draining. For smaller servicers, maintaining a staff that is well-versed on loss mitigation requirements for a wide range of loan types can be cost prohibitive.

This not only impacts a servicer’s bottom line, but it also shifts their focus away from other critical servicing functions like customer service and retention.

Q: What are the risks for servicers?
The risks are enormous. Agencies like HUD have very specific requirements outlining the order in which loss mitigations options must be exhausted. One small mistake or misstep could void a guaranty or insurance claim, leading to a big charge against earnings and a significant loss of liquidity. For smaller servicers, the consequences of missing an agency requirement or not following the correct waterfall sequence are even more precarious, since they don’t have the capital or liquidity to absorb the hit.

Q: How are smaller servicers able to cope?
Given the complexity and frequent changes in loss mitigation requirements and the risk of noncompliance, most smaller services need help. The savvier ones utilize third-party default servicing specialists that stay abreast of the latest agency rules and guidelines, constantly monitor local, state, and national government regulations, and are connected to non-agency investors. By tapping this expertise, smaller servicers can focus on their core competencies and maximize efficiency while minimizing their compliance risks.

A capable third party will also have advanced software tools and internal procedures that help servicers match information about individual borrowers with the appropriate loss mitigation options.

Additionally, third parties with a broad client base gain a best practices advantage that just isn’t possible for servicers working in their own silos. Essentially, they act as an extension of the servicer’s business, providing the expertise and real-time loss mitigation assistance that most smaller organizations lack internally.

Q: So, what is the solution to these complexities?
Beyond getting professional assistance, the key to navigating these complexities lies in simplifying the process for borrowers. What we’ve found works best is meeting borrowers where they are already the most comfortable and engaged—their smartphones. Borrowers should be able to submit a simple loss mitigation application and any required documentation right from their smartphone or tablet. This increases engagement and response rates and speeds up time-sensitive loss mitigation processes.

For smaller servicers, leveraging technology to facilitate mobile interactions can be a game-changer. It reduces the servicer’s administrative burden, minimizes errors, and allows servicers to focus on other high-level tasks. Of course, the benefits go beyond loss mitigation. Embracing mobile technologies that align with current consumer behaviors can help servicers streamline their overall operations, improve customer satisfaction, and stay ahead in an ever-changing landscape.

Q: How does the borrower learn of their options?
There are multiple ways borrowers can learn about their options. The most obvious are the borrower reaching out to the servicer directly to explain their situation or the servicer reaching out to them. However, many borrowers who are experiencing financial difficulties are hesitant about talking with someone about their circumstances.

Q: How crucial is staff training and development in addressing servicing challenges?
Staff training and development are indispensable when it comes to tackling the complexities of mortgage servicing. Because loss mitigation regulations and guidelines are in constant flux, it’s crucial for servicers to stay abreast of the latest changes, even if they are leveraging third-party expertise.

That’s where we’re a little different than most default experts. We not only keep a close eye on new servicing guidelines and regulations, but also provide customized staff training programs for small- and medium-sized servicers. Basically, we provide our clients’ teams with tools and resources that help them navigate the intricacies of default servicing rules, so they can focus on providing top-notch service to their customers. Time and time again, I’ve seen investments in staff training pay immediate dividends in operational efficiency and borrower retention—which, at the end of day, is what servicing is all about.