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Alright, the next topic 
in the business process,

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it also relates to risk management,
and that's loss mitigation.

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If you're in the business 
of bearing default risk, --

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if you can reduce the cost of defaults, --

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then you can have 
more profitable business, --

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regardless of the level of defaults.

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So loss mitigation 
becomes another important

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kind of implementation function.

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So one of the first things you do
with loss mitigation

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is you have to have a policy.

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What do you do --

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or what do you want the loan servicer
acting on your behalf to do --

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when the borrower is late one payment,

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late two payments?

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How quickly do you want to foreclose?

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Do you want to have 
foreclosure alternatives?

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Or do you always just want 
to foreclose whenever --

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the borrower has committed 
the legal offenses, so to speak,

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that justify foreclosure?

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So should there be 
foreclosure alternatives?

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Now, on a lot of these things,
you're going to face legal constraints.

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You might want to foreclose quickly, 
but the law doesn't allow it.

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And the other constraints; --

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which maybe I shouldn't put 
in the same category as legal constraints;

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I'll put investor constraints
or complications.

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So, we'll talk about this more 
probably in another video,

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but when there are investors 
in a mortgage loan,

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there are going to be some contractual
obligations that you have, --

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if you're bearing the risk 
that they're going to cause problems,

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or there may be conflicts 
between different investor classes

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in terms of what would be the most
profitable loss mitigation strategy.

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Ultimately, this will take 
the form of legal constraints.

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The contract terms involved

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between the investors 
and whoever is servicing the loan.

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So back to this issue of 
foreclosure alternatives.

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There's what's known as a short sale --

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where the lender allows 
the property to be sold --

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for an amount that's less 
than the mortgage balance --

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and just takes the loss that way.

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An advantage of that 
is one of the big risks in --

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the whole foreclosure procedure is --

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that borrowers not only 
don't maintain properties,

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but they'll actually 
steal things out of them.

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You know, you can sell the copper wiring
out of the house, for example.

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Properties and foreclosure 
tend to radically depreciate, --

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and so by doing a quick short sale --

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convincing the borrower 
to sell the property earlier

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rather than going through 
the foreclosure procedure

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saved you some legal expenses, --

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and also, it reduces this risk of

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the property basically 
being gutted by the borrower.

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Some companies try, --

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as when the borrower 
is late with making payments,

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some forms of counseling, or --

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you can either go through 
an expensive process,

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a labor-intensive process of 
working with the borrowers: --

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counseling, working with borrowers.

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Or you can try to save on the labor

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and you just send out the notice 
saying, "Your payment's late," --

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and then you send out
the foreclosure notice.

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So you can either be 
labor-intensive or not.

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That's just a choice.

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Finally, there's a choice, --

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and, again, this may not be available 
because of legal or investor constraints,

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but you can modify the mortgage.

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You can say, "Okay, well, looks like
you can't pay that mortgage,

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but maybe we will lower the loan balance,
or we'll lower the interest rate.

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We'll do a loan modification."

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Loan modifications actually 
have a terrible track record.

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I just re-mention this;
they have a very high re-default rate.

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They had a high re-default rate
in good times,

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and to the extent 
that they've been tried --

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in the most recent housing crisis.

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They've had, if anything, an even higher
re-default rate than good times.

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So it doesn't work terribly well.
It does not have a good track record.

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It's labor-intensive, --

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so it imposes a lot of costs 
on the servicers because

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you really have to make 
a lot of judgment calls

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about whether a modification will work,

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whether it won't work, 
how to make it work.

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And each case tends to be different, --

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so it's a very labor-intensive process.

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It doesn't have 
a good track record as far as --

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saving money in the default process.

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I should point out that, 
when I talked about legal constraints, --

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each state has different rules.

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Some of them are designed 
to keep borrowers, --

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make it harder to foreclose,
some make it easier to foreclose.

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The easier it is to foreclose, 
usually the less cost and the lower loss.

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The harder it is to foreclose, --

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the more likely it is that
the lender will lose a lot of money

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by the time they get around
to completing the foreclosure process.

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So overall, this loss mitigation area 
is a very interesting area because --

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if it's pretty typical to lose
sort of 50% of the loan amount

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when you go through a foreclosure;
and I think that is pretty typical;

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then if you could save 
a substantial portion of that,

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that would be a big deal
in mortgage lending.

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That would really improve things a lot.

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People often suggest that there are
magic bullets involved in loss mitigation.

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So, they'll say, "We think that
if you do X,

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maybe you will save substantial 
amounts of money."

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And the potential is there to do it,
but as far as I know,

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none of these things, the short sales,
the counseling, modifying mortgages, --

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foreclosure alternatives, --

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as far as I know, 
none of them is a magic bullet.

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Sometimes they save money,

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sometimes they make 
things worse in the end.

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I don't know, --

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at least as far as I know now,
there are no --

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magic bullets in loss mitigation.

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No matter how you do it, 
how you deal with it,

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with the loan default, --

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there's a lot of labor costs involved, --

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and there's a lot of 
financial losses involved.