This week, MortgageOrb caught up with Cheryl Lang, president of Integrated Mortgage Solutions, to get her thoughts on HAMP, strategic defaulters and borrower motivation. To read more from Lang, check out her blog, Ask ADAM.
Q: Now that the Treasury has, after months of buildup, published its short-sales/deeds-in-lieu guidelines for HAMP, what are your thoughts? Are you optimistic that the incentives and refined processes will make a material difference?
Cheryl Lang: There is little doubt that the Treasury is exploring every avenue to minimize foreclosures and help borrowers in any way possible. But we keep hearing many law professors advising borrowers to walk away and ‘improve’ their financial status by getting rid of a property that is underwater. With 25% of all borrowers underwater and that number predicted to rise, the industry needs some type of program that incentivizes the borrower to stay in the home by making the payment affordable and by bringing the unpaid principal balance in alignment with the market.
Q: In its recent announcement, the Treasury also stated it was stepping up efforts to increase HAMP awareness. How would you characterize borrowers' understanding of the program now, some 10 months after it was originally unveiled?
Lang: I think borrowers are more informed today due to the various avenues they have in order to get information. With Internet usage, television, radio and more importantly, neighbors, they are very aware of what options are available to them for mitigating losses. Servicers report that many current borrowers are calling and asking about loss mitigation.
Culling through those borrowers to determine who may be a victim of imminent default is difficult. And, of course, the delinquent borrower has difficulty getting through to the mortgage company, since everyone is calling, so it is a double-edged sword for the servicer. I believe the mortgage industry has done a tremendous job in a very short period of time communicating to borrowers what is available for loss mitigation and doing its best to keep borrowers in their homes.
Q: Brent T. White, an associate professor at the University of Arizona's James E. Rogers College of Law, recently published a paper in which he argued that borrowers who don't strategically default base their decisions off of emotional constraints. The report further says the government cultivates these constraints so that borrowers "ignore market and legal norms under which strategic default might be both viable and the wisest financial decision." What's the servicing industry's best hope for limiting these type of defaulters?
Lang: I read the white paper written by Mr. White. The message was very clear to the borrower: The financial impact of a homeowner's defaulting is not that great, and therefore, more homeowners should strategically default. Lenders do not typically pursue a deficiency judgment, and borrowers can repair their credit score within three years.
Since there are few disadvantages to strategic defaulting, Mr. White contends that borrowers should do what most businesses would do – maximize profits or minimize losses irrespective of concerns of morality or social responsibility. These same businesses tell borrowers that they have a moral and social obligation to pay their underwater mortgages. Mr. White calls this a double standard. Again, we need to incentivize the borrower to stay in the property. Our only answer to combating a strategic defaulter is to align the unpaid principal balance with the current market values.
Q: Servicers and their representatives are routinely meeting face to face with borrowers nowadays. Be it through community events, such as those organized by the Neighborhood Assistance Corporation of America and HOPE NOW, forced mediation or voluntary efforts in the field, in-person contact has become a major element of servicers' loss mitigation strategies. What are some of the less apparent, but no less important, considerations that servicers should be mindful of when meeting borrowers face to face?
Lang: Borrowers today are frustrated and emotionally drained for many reasons. Unemployment, although only a slight uptick was announced for the month of November, is still at an astounding rate. Homes are difficult to sell, financial disaster for many is just a paycheck away ,and they see the mortgage and banking industry getting bailed out by the Feds – and they are angry.
What appeared to be a subprime crisis has spilled over into the prime product, and what was a ‘housing bubble" has turned into a housing crash. Until we can get the unemployment stabilized in this country, the housing industry will continue to erode, and folks are just going to be angry until things begin to improve. It takes a lot of empathy on our part to understand borrowers' emotional state these days, but eventually, this, too, shall pass. The only question now is when.