MBA Staff
MBA NewsLink sat down with
Jon Daurio, chairman and CEO of
Kondaur Capital Corp., Santa Ana, Calif. The company acquires, manages, services and liquidates distressed mortgage loans. Information about the company can be found at
www.kondaur.com.
MBA NEWSLINK: How are lenders and servicers taking loss mitigation strategies more seriously, given the current economy and housing market?
JON DAURIO: I have not spoken to a single person lately who believes that our economy and the housing market will not suffer further in 2009. We believe that depreciation housing will average another 20 percent to 30 percent in 2009, relative to values in 2008, because the economy will be in serious trouble, which will lead to more default, which will mean more REO that will produce further housing depreciation.
Mr. Daurio is more pessimistic than some about the prospects for a housing market recovery, predicting that nationally home prices will fall another 20% to 30% under pressure from rising unemployment and a weakening economy. He still believes the country faces two to three more years of falling home values before markets stabilize.
As a result, I doubt any lenders or servicers are failing to take loss mitigation strategies more seriously. We believe that most loan owners are realizing that their existing servicing practices, including without limitation, loss mitigation strategies, are woefully inadequate. The most evident indication that lenders and servicers are taking loss mitigation more seriously is the magnitude of loan modifications in recent weeks. After months of failed attempts to modify loans, entities such as Ocwen, JP Morgan, Indymac, Citi and Bank of America have publicized significant new efforts they have take to succeed including both debt and rate reduction.
The core challenge, however, is determining whether the loan modification is truly in the best interest of both the borrower and the owner of the loan. First, there are a significant number of borrowers who simply purchased or refinanced "too much home." In other words, with the prevalence years ago of so many stated income and no-documentation loans — some with up to 100 percent of the value of the home being purchased or refinanced — some borrowers obtained a loan that had either or both: (a) too high a loan amount, and/or (b) too high a payment.
Furthermore, many of these loans had adjustment features that, despite some of the lowest long-term rates in history, would exacerbate an already bad situation. For example, "option ARM" and/or "pay option" loans, originated in 2004, 2005 and 2006, typically had a maximum five-year period during which the borrower had the option to make the lowest, or negatively amortizing, payment.
Many, if not a majority, of such borrowers typically obtained such loans so that they could make the negatively amortizing payment. Those borrowers are likely incurring a "payment shock" when the option terminates and they need to make a significantly greater payment, which is sometimes more than double the negatively amortizing payment. Moreover, such loans typically had a maximum loan-to-value ratio that, when reached as a result of making negatively amortizing payments, would also terminate the option.
Because of the rapid depreciation in housing prices over the last two years, many, if not the majority, of such loans have met and exceeded such maximum loan-to-value ratios, especially if the servicer and/or owner of the loan were to use the current, fair market value of the home securing the loan. Thus, in many cases, it would be in the borrower’s best interest to find a way to get out of the loan and the home in a manner that is least disruptive emotionally and economically.
Moreover, there is data being published showing that a significant number of modified loans have already defaulted. Therefore, it is extremely difficult for a servicer and/or owner of a loan to determine the value of a modified loan. Typically, value is determined by what a ready, willing and able buyer of loans would pay for the loan. If such value is less than what the owner of the loan would net by either foreclosing on the home or taking the home via a deed in lieu of foreclosure, the loan should probably not be modified and, rather, the loan should be sold.
It is our experience that many servicers are inadequately staffed both in terms of quantity and quality, to deal with the levels and types of defaults occurring today. Many such servicers are still being compensated under contracts entered into prior to the mortgage market meltdown and, therefore, do not provide sufficient compensation to hire a sufficient number of servicing personnel nor personnel with adequate levels of default management talent and experience.
NEWSLINK: Can any lender or servicer maintain an airtight loss mitigation strategy? If so, what would be its features? If not, how close can they come and how?
DAURIO: Nothing in the world of loss mitigation is "airtight;" however, some loss mitigation strategies are far superior to others. Superior loss mitigation strategies include each of the following features:
* Adequately
trained and experienced staff;
* Staff with a
minimal number of assets per person so that the loss mitigators can give each asset sufficient attention in terms of both magnitude and frequency;
*
Comprehensive policies and procedures for determining the true, current, fair market value of the homes securing the mortgages, as well as for determining the likely depreciation in the value of such homes.
Resources necessary to determine the best resolution of the asset, be it:
*
Modification of the terms of the mortgage;
*
Sale of the mortgage;
*
Refinance of the mortgage;
*
Deed in lieu of foreclosure;
*
Foreclosure;
*
Eviction;
*
Rehabilitation of the home that secured the mortgage; and
*
Marketing and sale of the home that secured the mortgage.
Loss mitigation must be more like the custom building of a vehicle, rather than the assembly line process to build. Asset managers must be personally involved in the determination of a home’s current and future value, the price paid for the purchase of the loan, the best resolution of the asset and the best procedures for managing the asset through such resolution.
NEWSLINK: Where does customer service training come into play?
DAURIO: Customer service is critical to loss mitigation. It is absolutely necessary to have staff adequately trained and experienced to deal with borrowers in these times with sensitivity and knowledge sufficient to determine and execute the resolution with the best interests of both the loan owner and the borrower in mind.
In addition, we have been told of too many instances where, when a loan owner determines that the sale of the loan is the best loss mitigation strategy, buyers failed to complete loan purchases either at all or timely and efficiently because the loan buyer did not have the proper staff to conduct a proper due diligence review of the loans prior to purchase, true access to adequate funds and the knowledge and experience to handle the transition of the loans post closing smoothly and efficiently.
NEWSLINK: What key trends do you see in 2009 and how has Kondaur positioned itself for them?
DAURIO: We see housing price depreciation averaging another 20 percent to 30 percent in 2009, relative to values in 2008, so many loan owners will realize that selling the loans, rather than trying to mitigate losses on their own, will be the best resolution. We have made the capital commitments necessary to become not only one of the largest "scratch and dent" loan buyers in the country, but to more than double our staff in the next few months. Kondaur currently has the ability to purchase, and has purchased, hundreds of millions of dollars of loans.
NEWSLINK: Which foreclosure prevention strategy has the best chance of succeeding and why?
DAURIO: With respect to nonperforming loans, the best foreclosure prevention strategy is to pay the borrower for a deed-in-lieu of foreclosure from the borrower. In this way, you can get cash into the hands of someone who is likely in dire need of it. Also, a deed-in-lieu of foreclosure may significantly reduce the time line for gaining possession of, rehabilitating, marketing and selling the home that the mortgage had secured.
NEWSLINK: Which one is most likely to fail and why?
DAURIO: We believe that most loan modifications are likely to fail. Typically, the net present value of foreclosing on the home materially exceeds the net present of value of the modified loan. Also, given the state of the economy and the resulting instability of jobs, any projections of the performance of the modified loans are suspect, especially when you take into account that even the modified loan is likely to have a loan–to-value ratio significantly less in the near future than the ratio in existence at the time of the loan modification. This ratio is critical because most borrowers are not as enthused to make payments on a loan that is near or in excess of the value of the home.
NEWSLINK: Will the secondary market return and, if so, when and what will it look like?
DAURIO: We believe that the secondary market for mortgage will return; however, it will likely be materially different from what we experienced prior to the mortgage meltdown. We believe that the federal government will take steps to ensure that Fannie and Freddie will continue to buy loans; however, terms of such loans will reflect far more conservative underwriting standards, similar to those in existence in the 1970s.
NEWSLINK: Describe some successful methodologies for succeeding in the distressed assets sector.
DAURIO: We believe that, like Kondaur, you must handle each asset individually. You must devote sufficient resources to manage each asset individually, without an assembly line approach. You must offer top notch customer service to the loan owners seeking to sell the assets and you must absolutely be sensitive to the situations of each individual borrower.
(The views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association.)