WEBVTT 00:00:01.668 --> 00:00:06.114 Alright, the next topic in the business process, 00:00:06.114 --> 00:00:10.560 it also relates to risk management, and that's loss mitigation. 00:00:13.155 --> 00:00:15.893 If you're in the business of bearing default risk, -- 00:00:16.210 --> 00:00:20.016 if you can reduce the cost of defaults, -- 00:00:20.296 --> 00:00:24.838 then you can have more profitable business, -- 00:00:25.058 --> 00:00:28.295 regardless of the level of defaults. 00:00:29.064 --> 00:00:32.951 So loss mitigation becomes another important 00:00:32.951 --> 00:00:35.076 kind of implementation function. 00:00:37.265 --> 00:00:39.793 So one of the first things you do with loss mitigation 00:00:39.793 --> 00:00:41.242 is you have to have a policy. 00:00:41.302 --> 00:00:43.374 What do you do -- 00:00:43.554 --> 00:00:48.099 or what do you want the loan servicer acting on your behalf to do -- 00:00:48.357 --> 00:00:50.958 when the borrower is late one payment, 00:00:50.958 --> 00:00:52.605 late two payments? 00:00:52.959 --> 00:00:55.172 How quickly do you want to foreclose? 00:00:56.443 --> 00:01:01.733 Do you want to have foreclosure alternatives? 00:01:05.325 --> 00:01:09.369 Or do you always just want to foreclose whenever -- 00:01:09.914 --> 00:01:14.703 the borrower has committed the legal offenses, so to speak, 00:01:14.703 --> 00:01:17.402 that justify foreclosure? 00:01:17.631 --> 00:01:20.159 So should there be foreclosure alternatives? 00:01:20.486 --> 00:01:24.000 Now, on a lot of these things, you're going to face legal constraints. 00:01:25.181 --> 00:01:29.320 You might want to foreclose quickly, but the law doesn't allow it. 00:01:30.019 --> 00:01:32.455 And the other constraints; -- 00:01:32.685 --> 00:01:36.786 which maybe I shouldn't put in the same category as legal constraints; 00:01:37.373 --> 00:01:42.432 I'll put investor constraints or complications. 00:01:43.092 --> 00:01:47.204 So, we'll talk about this more probably in another video, 00:01:47.204 --> 00:01:52.872 but when there are investors in a mortgage loan, 00:01:53.202 --> 00:01:56.951 there are going to be some contractual obligations that you have, -- 00:01:58.484 --> 00:02:01.584 if you're bearing the risk that they're going to cause problems, 00:02:01.584 --> 00:02:05.857 or there may be conflicts between different investor classes 00:02:06.242 --> 00:02:11.521 in terms of what would be the most profitable loss mitigation strategy. 00:02:13.580 --> 00:02:17.360 Ultimately, this will take the form of legal constraints. 00:02:18.633 --> 00:02:21.514 The contract terms involved 00:02:21.514 --> 00:02:25.988 between the investors and whoever is servicing the loan. 00:02:28.025 --> 00:02:32.539 So back to this issue of foreclosure alternatives. 00:02:33.005 --> 00:02:37.655 There's what's known as a short sale -- 00:02:38.355 --> 00:02:45.964 where the lender allows the property to be sold -- 00:02:47.410 --> 00:02:52.034 for an amount that's less than the mortgage balance -- 00:02:52.514 --> 00:02:55.726 and just takes the loss that way. 00:02:56.904 --> 00:03:00.235 An advantage of that is one of the big risks in -- 00:03:00.392 --> 00:03:03.325 the whole foreclosure procedure is -- 00:03:06.697 --> 00:03:10.597 that borrowers not only don't maintain properties, 00:03:10.817 --> 00:03:15.132 but they'll actually steal things out of them. 00:03:15.132 --> 00:03:18.964 You know, you can sell the copper wiring out of the house, for example. 00:03:20.896 --> 00:03:28.163 Properties and foreclosure tend to radically depreciate, -- 00:03:28.585 --> 00:03:32.338 and so by doing a quick short sale -- 00:03:40.618 --> 00:03:45.488 convincing the borrower to sell the property earlier 00:03:45.488 --> 00:03:47.927 rather than going through the foreclosure procedure 00:03:47.927 --> 00:03:50.541 saved you some legal expenses, -- 00:03:51.579 --> 00:03:54.735 and also, it reduces this risk of 00:03:54.735 --> 00:03:58.131 the property basically being gutted by the borrower. 00:04:06.140 --> 00:04:07.954 Some companies try, -- 00:04:08.348 --> 00:04:11.028 as when the borrower is late with making payments, 00:04:11.028 --> 00:04:14.978 some forms of counseling, or -- 00:04:17.933 --> 00:04:22.431 you can either go through an expensive process, 00:04:22.431 --> 00:04:25.925 a labor-intensive process of working with the borrowers: -- 00:04:27.003 --> 00:04:30.089 counseling, working with borrowers. 00:04:30.279 --> 00:04:32.186 Or you can try to save on the labor 00:04:32.186 --> 00:04:35.420 and you just send out the notice saying, "Your payment's late," -- 00:04:36.368 --> 00:04:38.475 and then you send out the foreclosure notice. 00:04:38.475 --> 00:04:40.566 So you can either be labor-intensive or not. 00:04:40.566 --> 00:04:42.159 That's just a choice. 00:04:43.048 --> 00:04:44.766 Finally, there's a choice, -- 00:04:45.196 --> 00:04:50.090 and, again, this may not be available because of legal or investor constraints, 00:04:50.090 --> 00:04:52.165 but you can modify the mortgage. 00:04:52.498 --> 00:04:55.231 You can say, "Okay, well, looks like you can't pay that mortgage, 00:04:55.231 --> 00:04:59.266 but maybe we will lower the loan balance, or we'll lower the interest rate. 00:04:59.675 --> 00:05:01.701 We'll do a loan modification." 00:05:02.162 --> 00:05:06.205 Loan modifications actually have a terrible track record. 00:05:07.646 --> 00:05:10.937 I just re-mention this; they have a very high re-default rate. 00:05:10.937 --> 00:05:14.225 They had a high re-default rate in good times, 00:05:14.225 --> 00:05:17.639 and to the extent that they've been tried -- 00:05:17.988 --> 00:05:20.276 in the most recent housing crisis. 00:05:20.456 --> 00:05:25.093 They've had, if anything, an even higher re-default rate than good times. 00:05:26.126 --> 00:05:31.539 So it doesn't work terribly well. It does not have a good track record. 00:05:35.806 --> 00:05:37.547 It's labor-intensive, -- 00:05:38.297 --> 00:05:41.722 so it imposes a lot of costs on the servicers because 00:05:41.722 --> 00:05:45.975 you really have to make a lot of judgment calls 00:05:45.975 --> 00:05:49.641 about whether a modification will work, 00:05:49.641 --> 00:05:51.788 whether it won't work, how to make it work. 00:05:53.115 --> 00:05:56.747 And each case tends to be different, -- 00:05:57.067 --> 00:06:00.139 so it's a very labor-intensive process. 00:06:02.438 --> 00:06:06.514 It doesn't have a good track record as far as -- 00:06:06.644 --> 00:06:09.311 saving money in the default process. 00:06:10.416 --> 00:06:13.947 I should point out that, when I talked about legal constraints, -- 00:06:15.499 --> 00:06:20.592 each state has different rules. 00:06:25.533 --> 00:06:28.388 Some of them are designed to keep borrowers, -- 00:06:28.988 --> 00:06:32.679 make it harder to foreclose, some make it easier to foreclose. 00:06:32.839 --> 00:06:37.733 The easier it is to foreclose, usually the less cost and the lower loss. 00:06:38.531 --> 00:06:40.111 The harder it is to foreclose, -- 00:06:41.655 --> 00:06:44.588 the more likely it is that the lender will lose a lot of money 00:06:44.588 --> 00:06:48.711 by the time they get around to completing the foreclosure process. 00:06:54.493 --> 00:06:59.294 So overall, this loss mitigation area is a very interesting area because -- 00:07:01.298 --> 00:07:08.032 if it's pretty typical to lose sort of 50% of the loan amount 00:07:08.032 --> 00:07:12.042 when you go through a foreclosure; and I think that is pretty typical; 00:07:12.440 --> 00:07:16.774 then if you could save a substantial portion of that, 00:07:16.774 --> 00:07:19.534 that would be a big deal in mortgage lending. 00:07:19.534 --> 00:07:21.663 That would really improve things a lot. 00:07:24.695 --> 00:07:30.400 People often suggest that there are magic bullets involved in loss mitigation. 00:07:30.400 --> 00:07:33.810 So, they'll say, "We think that if you do X, 00:07:34.030 --> 00:07:36.548 maybe you will save substantial amounts of money." 00:07:36.548 --> 00:07:39.365 And the potential is there to do it, but as far as I know, 00:07:39.365 --> 00:07:43.756 none of these things, the short sales, the counseling, modifying mortgages, -- 00:07:44.777 --> 00:07:46.527 foreclosure alternatives, -- 00:07:46.975 --> 00:07:49.656 as far as I know, none of them is a magic bullet. 00:07:51.605 --> 00:07:53.495 Sometimes they save money, 00:07:53.495 --> 00:07:56.163 sometimes they make things worse in the end. 00:07:57.328 --> 00:07:58.444 I don't know, -- 00:07:59.396 --> 00:08:01.712 at least as far as I know now, there are no -- 00:08:02.961 --> 00:08:05.139 magic bullets in loss mitigation. 00:08:06.443 --> 00:08:09.066 No matter how you do it, how you deal with it, 00:08:09.246 --> 00:08:10.510 with the loan default, -- 00:08:11.473 --> 00:08:13.660 there's a lot of labor costs involved, -- 00:08:14.060 --> 00:08:17.468 and there's a lot of financial losses involved.