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Study Indicates that Holistic Financial Counseling Significantly Improves the Performance of Distressed Mortgage Loan Portfolios

 

Mortgage investors and servicers can avoid hundreds of millions of dollars in losses by providing borrowers with counseling that lowers monthly spending and frees up cash

New research by the noted STRATMOR Group reveals that providing holistic financial counseling to borrowers who are at risk of default and foreclosure can not only prevent foreclosure, but also can reduce re-default rates for borrowers. According to the November 2011 study, holistic financial counseling could reduce losses on a 10,000 file portfolio by as much as $71.5 million.

The detailed findings of the study, sponsored by Outreach Financial Services, a specialty servicer of distressed mortgage assets, are available in a white paper entitled “The Impact of Consumer Credit Counseling on Distressed Mortgage Loan Losses,” which is available at www.NFCC.org.

“Almost 29 percent of all homeowners are underwater on their home mortgages now, owing more on them than they are worth,” said Bill Magro, President and CEO of Outreach Financial Services. “With an estimated six million plus home loans delinquent today, and the potential for another two to three million borrowers to default over the next three years, we believe we can help avoid foreclosure losses on well over one million homes,” Magro said. “That equates to saving the primary financial investment of their lifetimes for these families. It also means savings of tens of billions of dollars for the servicers of these mortgages and their investors in the mortgage-backed securities.”

While traditional borrower counseling in default servicing focuses mainly on the monthly mortgage payment, integrating holistic financial counseling addresses the entire spectrum of a borrower’s financial picture, including lifestyle decisions. Holistic financial counselors help borrowers assess all the factors that go into monthly spending, including credit card debt, car payments, and discretionary spending.

According to the new white paper, authored by Matthew M. Lind, PhD, managing director of the STRATMOR Group, the loan modification model of using credit counselors to work with homeowners on lifestyle savings will reduce their monthly spending by an estimated $300 per month. When combined with a prospective $550 reduction on the monthly mortgage payment from the sample loan modification, homeowners realized approximately $850 per month in freed up cash flow, sharply lowering the predictive foreclosure and re-default rate for borrowers who initially cured their loan through a loan modification.

Standard mortgage counseling limits losses and lowers the re-default rate on loan modifications, the study notes. When taken a step further with holistic financial counseling, even greater improvements are realized. For borrowers receiving standard counseling, Dr. Lind’s research estimates annual losses avoided at $3,894 per borrower on a $210,000 average loan balance. The annual benefit increases up to $7,147 if borrowers receive holistic financial counseling that addresses not only the mortgage debt, but all aspects of their finances. Applied across a portfolio of 10,000 loans, the annual $7,147 scalable benefit would project into $71.47 million in losses avoided.

Outreach Financial Services’ holistic credit counseling approach engages certified credit counselors who work on behalf of borrowers to reduce not just delinquent mortgage payments, but all monthly consumer debt payment obligations. This consumer-centric credit counseling approach in the loan modification process typically frees up hundreds of dollars monthly due to the lower debt payments and lifestyle spending reductions from the borrower household. The availability of this additional cash flow results in significant improvement in the performance of the modified loans, achieving lowered foreclosure and redefault results.

When combined with additional savings, the loss avoidance and total benefit-to-cost ratio is projected to reach or exceed a 10:1 ratio for each dollar spent on this form of distressed mortgage counseling. While lender and servicer employees normally are legally restricted to only discuss the mortgage debt with borrowers, Outreach Financial Services has a unique arrangement with the NFCC. The NFCC has 91 nonprofit member agencies and uses over 2800 certified credit counsellors to holistically review a complete financial profile with borrowers. The Outreach Financial Services-NFCC program provides borrowers with a free one hour consultation with a NFCC counselor located at one of the 800 NFCC offices nationally.

“It is clear from the research that using a holistic financial counselling approach, with a focus on spending reduction, improved financial behaviors and adherence to a budget, can significantly reduce foreclosures,” Magro said. Dr. Lind’s research is based on the 2010 Urban Institute’s National Foreclosure Mitigation Counselling Program Evaluation Study. Additional data was developed from a multivariate statistical analysis based on a sample of roughly 335,000 loans tracked by LPS Applied Analytics, along with data provided by the NFCC.

About STRATMOR Group

STRATMOR Group provides the mortgage industry with objective industry-leading data, information and insights that also drive its consulting practice. It specializes in performance benchmarking and operational analysis, strategy development, mergers and acquisitions, high-level technology advice, financial modelling and proprietary surveys. STRATMOR Group is located in Peachtree City, Georgia.

About Outreach Financial Services

Outreach Financial Services, LLC, is a specialty and component sub-servicer that focuses on helping mortgage investors and servicers maximize the loan performance of delinquent and defaulting mortgage loans. Through an agreement with The National Foundation for Credit Counseling, OFS provides critical counseling, educates borrowers, and identifies the best way to restructure mortgage payments. Outreach Financial Services is based in Jacksonville, Florida. The OFS website can be found at www.outreachfs.com.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

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