Help Members (and Yourselves) Avoid the Worst of Mortgage Delinquencies

Like most lenders, credit unions are on a steep learning curve to create and implement effective loss-mitigation practices. While challenging, a successful loss-mitigation program can strengthen member relationships and demonstrate the credit union's value.

Credit unions have a key advantage over banks: preserving homeownership is a natural extension of credit union philosophy. With this outlook, loss mitigation should focus on avoiding foreclosure and preserving homeownership by assisting a delinquent borrower to become current on loan payments. This process supports an ultimately positive outcome. In addition, the more personal nature of credit unions allows a more customized approach in assessing and resolving delinquencies.

Foreclosure does not benefit the member or the credit union. Preserving homeownership and strengthening communities should be the credit union's goal with loss mitigation. Borrowers who go through foreclosure suffer damaged credit and lose their homes. Credit unions must manage the expenses and headaches of owning real estate and organizing its resale. Besides significant costs for all parties, foreclosures can negatively impact communities through vacant properties that generate petty
vandalism, declines in neighborhood values and demoralized residents.

Some credit unions are approaching mortgage delinquencies as if they were auto loans. Unlike cars, though, houses are an illiquid asset and usually cannot be sold quickly–especially in this market–nor can they be foreclosed upon quickly. Depending on applicable state law, the process of default, workout, foreclosure, resale can take a year to complete, while the comparable process for auto loans takes about 30 days.

Because the process time is so short, credit unions are tempted to take a quick fix approach to delinquent auto loans in order to get an immediate payment. This can be counterproductive with mortgage delinquencies, where curing the default and, if possible and appropriate, avoiding foreclosure is the objective. If a credit union focuses on extracting a one-time payment instead of approaching the borrower's situation holistically to develop a long-term plan, it could merely delay the foreclosure process rather than avoid it.

Credit unions should examine the reason for the delinquency, how the member can be helped back on track, the member's current financial situation, and the appropriate loan for the borrower's circumstances.

Credit unions can involve other interested parties in putting together their loss-mitigation programs. The investor, such as Fannie Mae or Freddie Mac, the appraiser and other key contacts can play an important role in resolving delinquencies. Credit counseling agencies are another valuable resource credit unions should engage. Talk to these parties about providing staff training and call scripts for talking to members.

Credit unions also rely on the experience and resources of their mortgage insurance providers. In most cases, working closely and quickly with their loss-mitigation personnel can significantly increase your success rate on delinquent loans.

Once a loan becomes delinquent, delay is the enemy. Early intervention is critical. At this point, assessing the borrower's willingness and ability to pay will determine your choice of loan workout. Getting information to help you develop an accurate assessment may be difficult.

About half of borrowers facing foreclosure never contact their lender after the date of their first missed mortgage payment. The lender must usually engage the borrower. Typically, letters are ignored and phone calls avoided–usually due to embarrassment and hopelessness.

Contact members as early as possible. Typically, CMG Mortgage Insurance Co. strongly recommends a timeline that requires servicers to call the borrower on the 16th day past due. At 60 days past due, CMG also recommends updating the delinquent member's credit, income and property valuation to get an idea of the member's overall financial picture.

Mortgage insurers are also experienced and knowledgeable about the available tools and the circumstances appropriate to their use in developing a workout plan. At CMG, we advise credit unions on best practices that servicers use for loss mitigation and may provide useful training and support. We can also help you evaluate loss-mitigation options under the master policy.

Besides helping credit unions to reinstate delinquent loans, mortgage insurers can assist if these loans move to default. An insured loan for a property that goes into foreclosure helps to protect the credit union from the worst consequences, not only in terms of the original coverage but also in handling the expenses associated with short sales.

Mortgage insurers have as much of a vested interest in a successful workout as the borrower and credit union, and their experience and institutional know-how can maximize the potential for success.

The current cycle may continue for a couple of years. By working now with mortgage insurers and other third parties, credit unions can build a solid loss-mitigation infrastructure using best practices that can not only cope with delinquencies in the present emergency, but also strengthen member relationships and communities far into the future.

Brian Shepherd is senior vice president and general manager of CMG Mortgage Insurance Co. He can be reached at 415-284-2520 or at brian.shepherd@cmgmi.com