The critical roles mortgage lenders, investors, and servicers all play by funding, managing, and administering mortgage loans is well known. While the mortgage process is complex and has many stakeholders with various responsibilities, most transactions go relatively smoothly. However, not every loan is trouble-free. Sometimes, for a variety of reasons, homeowners stop making their mortgage payments. This is an inevitable part of any mortgage portfolio, however, if your loan portfolio is experiencing an increase in distressed loans, you must respond quickly to get them reperforming or risk taking a hit to your bottom line. That is where Velocity Servicing™ comes in. We offer a set of specialized services that proactively identifies at-risk loans and efficiently empowers you to preserve the value of your loan portfolio and maximize your ROI.
How can Velocity Servicing help you?
Lenders face challenges in managing distressed mortgage loans due to the risk of default, loss mitigation, regulatory compliance, operational complexities, valuation and disposition of distressed properties, and reputational concerns. Overcoming these challenges requires effective risk management strategies, compliance with regulations, efficient operational processes, and proactive communication with borrowers and other stakeholders. The good news is that Velocity Servicing provides the tools you need to preserve today’s cash flow and tomorrow’s customer relationship. At Velocity Servicing:
- A team of experts is employed to identify and optimize loans with the potential to reperform quickly.
- The value of the loan or servicing portfolio is maximized while mitigating risks in uncertain times using advanced data analytics.
- Complex investor and borrower finances are managed within a highly regulated environment with transparency into servicing performance, providing one-stop resolution.
- Decisioning technology with data, rules, and predictive analytics is used to craft relevant messages to customers across channels for successful personalized experiences.
Let’s look at three ways lenders turn distressed loans into performing loans faster and more efficiently – and how Velocity Servicing can help.
1. Understanding the Root Cause of the Distress
To develop solid solutions for converting a distressed mortgage loan into a performing loan, it is important to understand how it became distressed in the first place. Any loan in your portfolio is at risk for default, and many times, there are telltale signs that can give you insight into which loans have a higher risk of becoming delinquent. The key to success is identifying a distressed loan before the borrower stops making monthly mortgage payments. When onboarding a new loan, there are characteristics of that loan that could increase the risk of it defaulting, such as:
- Loan-To-Value (LTV) – If the LTV is high, there is little room to move if the property value starts to decline. If the loan balance eventually exceeds the value of the home, borrowers may no longer see the benefit in making the payments.
- Credit Score – There is a direct correlation between credit score and the propensity to pay the loan on time, which is why borrowers with lower credit scores tend to pay a higher rate at origination, which is meant to offset the cost of the risk being incurred by the lender.
- Debt-To-Income (DTI) – If a borrower’s DTI ratio is high (typically over 43%), they may not be well-equipped to handle periods of time when financial emergencies can make it difficult to pay their mortgages. A high DTI places the borrower only one step from financial hardship, making missed payments more likely.
The biggest reason why a performing loan with strong characteristics becomes delinquent is typically due to a dramatic change in a borrower’s financial situation. This can be attributed to a job loss, reduction in pay, divorce, or medical issue.
2. Taking a Portfolio-Wide Approach to Managing Distressed Loans
Once you understand the root causes that can turn a performing loan into a distressed loan, it is important to have a clear vision of how to turn the loan around and communicate those solutions to your clients. It is highly likely that borrowers who are struggling with paying their bills are terrified of getting a call from their mortgage lender, and nothing will shut down a conversation faster than the word “foreclosure.”
Not only is it crucial to have a plan for turning troubled loans around, but you need to have a way to succinctly and quickly analyze your portfolio to get ahead of the curve. Gone are the days when lenders poured over Excel spreadsheets to determine their loan portfolio’s current performance and inherent risk. In an age of automation and artificial intelligence, lenders can now employ a seamless workflow to analyze their portfolios and better position themselves to manage distressed loans. Wise lenders and loan portfolio investors know they need an effective loss mitigation process that identifies distressed loans early and initiates communication with those borrowers. The earlier that a loan modification, forbearance plan, or repayment plan can be put in place, the more likely you will avoid the foreclosure process and a possible short sale.
Establish Portfolio Goals
The first step in developing a process for managing distressed loans is to determine how much risk you are willing to take on, what type of loan characteristics you are comfortable with, and what product mix ratio makes sense for your long-term strategy. Velocity Servicing’s Portfolio ARC™ provides lenders with a true loss mitigation data model. It consists of an intelligent network of SLA triggers, exceptions, and loan-level conditions to prioritize work queues, focusing throughput where it matters.
It’s also important to develop a thorough onboarding analysis for every new loan coming into your portfolio and assign a level of risk that can be monitored. Review the borrower’s financial position, property value, and other risk factors to determine the likelihood of default at the onset.
Having real-time access to data analysis tools can help you identify trends and patterns in your loan portfolio. Velocity Servicing clients have access to LoanCare Analytics™, a proprietary, all-in-one portfolio management solution. The platform accelerates portfolio optimization analysis with extensive views and filtering, enabling lenders to connect the dots across their portfolio and take action down to the loan level.
Borrower Resolution Support
Once a loan becomes delinquent (30 days or later beyond the monthly payment due date), it is important to have a clear path to get those loans back on track. Depending on the needs of the borrower, offering a range of support services will help. Possible resolutions could include a loan deferment, total loan modification, financial counseling, or a property sale.
Loan Exit Strategy
Also known as a “loan disposition plan,” a loan exit strategy details how a loan will be paid back and closed out. It needs to include loan repayment options, refinancing or renewal options, a structure for the sale or disposal of the asset, or loan restructuring and modification options. It is important to have a strategy in place that provides maximum success for the lender while reducing the number of touches or contacts with the borrower (which can often create stress and friction).
3. Partnering with the Right Servicer
Not all servicers are created equal, especially when considering the complexities involved with distressed loans. Loan servicing requires a keen understanding of the regulatory requirements related to communicating with delinquent borrowers, loan dispositions, or loan workout options. As a division of one of the largest mortgage servicers in the U.S., Velocity Servicing has the experience and tools to help you manage your loan portfolio to maintain its value. When needed, we can help you choose the most effective loss mitigation process.
Working with a specialized servicer elevates the experience between you and your borrower in the following ways:
- Distressed Loan Management – A specialized mortgage servicer is well-versed in managing distressed loans, which typically involves borrowers who are facing financial challenges or struggling to make timely payments. These servicers have experience in dealing with complex loan situations, including loan modifications, forbearance agreements, and foreclosure processes. Their expertise can help navigate the challenges and complexities of distressed loans more effectively.
- Enhanced Borrower Assistance – Specialized loan servicers often have dedicated teams and resources to provide personalized borrower assistance. They can work closely with borrowers to understand their financial situations, explore available options, and provide guidance on how to avoid or mitigate potential foreclosure. This level of personalized assistance can help distressed borrowers better understand their options and find solutions that align with their financial circumstances.
- Efficient Loan Resolution Strategies – Specialized loan servicers typically have established protocols and strategies for resolving distressed loans efficiently. They can proactively manage and monitor loans, implement loss mitigation programs, and explore alternative options to minimize losses for both borrowers and lenders. Their expertise in loan resolution strategies can lead to more favorable outcomes for all parties involved.
- Compliance and Legal Expertise – Distressed loans often involve complex legal and compliance requirements. Specialized loan servicers have intimate knowledge of these requirements and can ensure that all legal and regulatory obligations are met. This can include managing foreclosure processes, navigating bankruptcy proceedings, adhering to local and federal laws, and handling documentation and recordkeeping. Compliance and legal expertise can help mitigate risks and ensure that loan servicing is conducted in accordance with applicable laws and regulations.
- Cost Containment – By leveraging their expertise, resources, and established processes, specialized loan servicers can help streamline loan servicing operations, contain overhead costs, and optimize loan resolution strategies. This can result in a more positive financial outcome for lenders and investors, as well as potentially improved outcomes for borrowers.
- Focus on Loan Performance – Specialized loan servicers typically prioritize loan performance and focus on maximizing recovery for lenders and investors. They work diligently to minimize losses and explore options to rehabilitate loans and help borrowers get back on track with their payments. Their specialized approach can contribute to better loan performance and recovery rates compared to general loan servicers.
Partnering with a specialized servicer such as Velocity Servicing will not only provide you with solutions above and beyond a typical servicer, but its model can also deliver a performance rate that is 36% faster than the traditional servicing model. With us by your side, you can:
- Gain immediate traction with a customized solution and real-time scalability
- Tap into expanded program expertise with custom client waterfalls/documentation that corresponds with monitor requirements
- Access a network of pre-resolution buyouts for immediate capture and capital optimization
- Leverage technology with an established risk management and compliance framework
- Reduce or eliminate the need for loan transfers
Protect Your Portfolio
Velocity Servicing offers clients the ability to leverage the scale of LoanCare, its robust compliance and risk management infrastructure, and its operational capabilities. We also provide the talent and process rigor proven to address the unique challenges of specialty loan servicing. We’ve invested in and developed tools specific to this strategy, and by providing the skillset and high-touch service necessary to move distressed loans into performing portfolios sooner, our partners experience better resolution times with significant reduction in losses.