Friday, July 25, 2008

Doing the Banks One Better

(Steven Pearlstein @ Washington Post) Here's a bit of irony: At a time when the financial system is drowning in a sea of mortgage foreclosures, the organization that has developed the most effective system for getting bankers to restructure troubled loans is a self-described "bank terrorist" who routinely refers to bankers as financial predators and loan sharks.

So why do these bankers continue to deal with Bruce Marks and his Neighborhood Assistance Corporation of America?

Perhaps because they're afraid that Marks might do to them what he did to the old Fleet Bank, or Bank of America, or Countrywide, sending out his shock troops to disrupt their annual meetings, demonstrate outside the homes of their directors or set up picket lines at their children's schools.

Or maybe it's because this same in-your face activist with an MBA is as good or better than they are at system development and customer service, and way better at underwriting loans to people living on the edge.

This impressive machine was on display here in Washington this past week when as many as 20,000 people descended on the Capitol Hilton looking for help in restructuring mortgage loans that they no longer could afford. They came by plane and train, car and subway, starting before dawn and continuing late into the night, all of them clutching tattered folders and envelopes stuffed with the documentary evidence of their financial hardship and miscalculation. Many had received one of the 1.2 million postcards mailed the week before, but even more seemed to have heard of the event from a friend, neighbor or relative who'd already been.

It was striking how well-organized and executed it all was. Outside, there were plenty of volunteers and staff -- 350 were flown in from around the country -- doling out information, advise and sympathy to those waiting in line. Inside, groups of 100 were given a quick orientation in English and Spanish before having their key documents scanned into NACA's computers and proceeding to one-on-one sessions with a NACA financial counselor in the giant hotel ballroom.

In the space of 30 to 60 minutes, the well-trained, upbeat counselors managed to win the trust of their new clients, wring promises of a more frugal lifestyle and enter into their computers the relevant financial details. At a push of a button, NACA's underwriting system declared how much the client could afford in monthly mortgage payments, and automatically requested the mortgage servicing company to modify the loan accordingly. Depending on the service and the loan, the answer might be available in a matter of days or even hours. In about half the cases, the result is likely to be a below-market, fixed-rate loan with hundreds of dollars cut from their monthly payments.

A lot depends on which bank is servicing the loan. Bank of America and Citigroup, early targets of Marks' outrageous guerrilla tactics, had provided billions of dollars in mortgages through NACA to first-time homebuyers. The arrangements were meant to quiet a pesky critic and help the banks satisfy federal community reinvestment requirements. In time, however, the banks discovered that their NACA loans performed as well, or better, than the loans they had written themselves in those communities. So when Marks last year proposed to use the same process and underwriting software to negotiate loan modifications, Citigroup and Bank of America agreed to participate. Countrywide followed suit after swarms of NACA protesters closed down several of its offices.

Mark's next target: Wells Fargo.

This week's Washington event was so successful that Marks plans to take it on the road in eight other cities this fall. NACA got $15 million from the pot of federal money appropriated last year for financial counseling, along with $3.5 million from Fannie Mae and Freddie Mac. It also receives $150 for every loan that is successfully modified -- surely less than it would have cost the banks to deal directly with the borrowers.

Not that the banks aren't doing plenty of loan modifications on their own. By their count, the major banks and servicers in the Hope Now coalition have modified 530,000 loans in the past year, along with an additional 1.2 million "repayment plans" that delay payments but don't reduce them. Large numbers of at-risk borrowers have still not responded to lenders' outreach efforts.

What's remarkable about NACA's format is how efficient it is, and how enthusiastically people respond to it. Hope Now recently touted that it had sponsored 14 regional workshops at which homeowners facing foreclosures could consult with counselors and talk directly to representatives of all the major lenders. But those 14 events in 14 cities attracted a grand total of 6,000 homeowners. That's not much more than NACA was able to attract in single city in a single day.

It's not hard to figure out why. Homeowners facing foreclosure are probably going to be more responsive to an organization that treats them as victims, rather than deadbeats, and promises to be their advocate in wringing concessions from lenders. And by combining the function of trusted financial counselor and advocate with a credible loan underwriter, NACA seems to have created a model that is faster, cheaper and generates better results for both borrowers and lenders.

The big lesson here is that the foreclosure crisis is not unsolvable and that the solution need not involve large sums of taxpayer money. With home prices still falling and the economy headed into recession, mortgage lenders and investors have begun to realize that they will likely end up with less money with foreclosure than loan modification. And servicing companies are realizing that they need to rely on technology to quickly approve large number of modifications rather than holding out for the last dollar and requiring that any deal be reviewed by multiple supervisors.


Anonymous said...

I'm all for it IF it's the banks that eat the costs of taking the loans to a level that the consumer can live with and the bank or other financial institution can still remain afloat with too. As long as tha taxpayer is not eating the cost of the foreclosure that was due to homebuyers greed or stupidity, as many were/are, go for the gusto!

Cormick Grimshaw said...

This should work out best for everyone. Foreclosures are very expensive and this bill removes redefault risk, which is one of the reasons servicers don't like to forgive principal.