When homeowners fall behind on their house payments, they occasionally get help from an unexpected source: the mortgage insurer.
Mortgage insurance companies have their own loss-mitigation departments, where employees try to reduce foreclosures. Most mortgage insurers employ people who work directly with borrowers over the phone, negotiating loan modifications or repayment plans.
Lenders, and their mortgage-servicing arms, have loss-mitigation departments, too. But borrowers find it hard to discern the difference between the servicers' bill collectors and their loan-workout negotiators. Conversations with bill collectors are stressful, so a lot of delinquent borrowers stop answering phone calls and letters from their servicers. Borrowers sometimes are more receptive to mortgage insurers, who don't call seeking immediate payment.
In a foreclosure, the mortgage insurer reimburses the servicer and investor for their losses. This means that mortgage insurers are motivated to negotiate workouts with borrowers who have fallen behind on their payments.
Alan Goldberg, vice president of homeowner assistance for mortgage insurer Genworth, explains the process:
"The servicer is required to do workouts, and they're pretty good at it," he says. "They do their normal contacts with the borrower, and most workouts get done that way."
But some don't. Each month, the mortgage insurance companies get lists of insured loans that are delinquent. "From that group of borrowers we can select a group of people we would like to contact," Goldberg says. "We attempt to contact them for 60 days. We send them a letter first explaining who we are -- some are familiar with Genworth, some are not -- and we explain that we're their mortgage insurance company, that we have an interest in their loan, and that the servicer has advised us that they're having trouble paying their bill, and that we're here to help them."
The letter contains a brochure with a link to the company's Web site as well as a phone number to call the loss-mitigation department. "About five or six days after we send them that letter, if we haven't heard from them, then we start to attempt to call them," Goldberg says. "We explain who we are, obviously there are no fees at all -- they're included when they bought their mortgage insurance."
The borrower is asked to fill out and return a workout package, documenting work history, income, expenses, debts and assets. "It gives us a full financial picture," Goldberg says. In addition, the borrower fills out a hardship letter. "It basically says: 'What is the problem? Why you can't pay this? Did you have medical issues? Did you get laid off from your job? What is the situation that's causing you to have this hardship?'"
The information is entered into a computer that analyzes the borrower's financial situation and recommends workout scenarios -- payment plans, modifications or refinances.
Terms of a workoutA loan workout can proceed only if the servicer, investor and mortgage insurance company approve it unanimously. Mortgage insurers have a good idea of what is and what isn't acceptable to servicers and investors. "The servicer, if they're in concurrence, would contact the borrower and actually do the closing on the workout. That's basically the process," Goldberg says.
Spokespeople for other mortgage insurers, such as AIG United Guaranty, MGIC, PMI Group and Radian, say that their processes are similar. But not identical: PMI Group and Radian don't negotiate with borrowers directly. Instead, they outsource that work to nonprofit credit counseling agencies. Most insurers "embed" workout specialists inside the loss-mitigation offices of large mortgage servicers to speed up negotiations and fast-track workout approvals.
A mortgage insurance company gives the delinquent borrower someone else to negotiate a workout with. But few homeowners can take advantage because most borrowers avoided mortgage insurance during the housing boom and instead got piggyback loans. According to Inside Mortgage Finance, about $9 trillion in mortgages was originated in 2004, 2005 and 2006, and mortgage insurance backed up about $798 billion of that -- only 8.9 percent.
Incentive to forecloseThere's an ironic twist associated with mortgage insurance: It sometimes gives servicers the incentive to foreclose on a property instead of negotiating a loan workout. It can be more profitable for the servicer to foreclose, collect the mortgage insurance claim and be done with a pesky borrower.
There are two fixes to the perverse incentive to foreclose on an insured loan instead of modifying it. One fix applies to loans owned by Fannie Mae and Freddie Mac. The federal government requires servicers to modify loans owned by Fannie or Freddie when possible under the Home Affordable Modification program, even if foreclosure would be less unprofitable.
The other fix applies to loans that aren't owned by Fannie or Freddie. The mortgage insurance industry has instituted a "Second Look" program, under which servicers promise to give mortgage insurers a crack at modifying a loan before starting foreclosure.
Partial claimsMortgage insurers can pay "partial claims" to reimburse servicers for borrowers' late fees or unpaid interest, or even to reduce the amount of principal owed. For example, if a mortgage insurer is on the hook to pay up to $50,000 to the servicer in the event of foreclosure, the insurer might pay a partial claim of up to $7,500 to get the loan current again and give the borrower a second chance.
Paying a partial claim "serves our interest to keep that borrower out of foreclosure," says Cam Melchiorre, Radian's senior vice president of loss management.
Melchiorre adds that foreclosure can't be prevented if borrowers ignore letters and calls from servicers and mortgage insurers. "At the end of the day, if you don't have a cooperative borrower ...," he says, letting the incomplete sentence hang there. "One of the problems is that we need to articulate the number of failures because of lack of borrower cooperation."
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