A life preserver for loans.

Author:Abraham, Jesse
Position:Servicing - Includes related article on EarlyIndicator - New tool designed for coping with the problem of servicing delinquent mortgages - Cover Story

MGIC and Freddie Mac's EarlyIndicator[SM] is giving FHA mortgage servicers a simple way to reduce delinquencies, increase workouts and potentially avoid stiff penalties. It's a proven tool for keeping delinquent borrowers afloat as homeowners.

Imagine this: It's the 14th of the month, and you're sitting at your desk scrolling through a list of - oh, pick a number - 10,000 mortgages insured by the FHA, when all of a sudden the phone rings and the guy at the other end tells you he has a sure-fire way to pick the 3,600 borrowers you don't have to call. Let's see, at $2 to $3 per phone call, that means a potential instant savings of as much as $10,800 per month in outbound calls alone.

What's more, this "sure-fire way" has been proved time and again in the marketplace as a fast and reliable way to predict which late-paying or defaulted mortgages are most likely to generate a loss. That means you can target your resources to maximize your FHA loss-mitigation efforts and reduce your risk of getting slapped with the stiff treble damage fines that Congress authorized last year to stimulate more FHA workouts. Even better, the guy says, it's a tool that you - or your service bureau - may already have in the shop and can use at no additional cost. It's called EarlyIndicator[SM].

Consider yourself called. At a time when FHA delinquency and foreclosure rates are triggering Department of Housing and Urban Development (HUD) and congressional concern (FHA delinquencies hit a record 8.65 percent during in the fourth quarter of 1998), a growing number of servicers are responding to HUD's push to help more FHA borrowers succeed as long-term homeowners by turning to automated risk-management tools like EarlyIndicator. The results, according to servicers using EarlyIndicator with their delinquent FHA portfolios, include the following:

* A 10 to 30 percent reduction in outbound collection calls as well as a healthy decline in inbound calls;

* More objective and targeted collection and loss mitigation action plans; and

* Across-the-board improvements in workout rates, delinquencies and staff efficiency.

Take the experience of Buffalo, New York-based HSBC Mortgage Corporation (formerly Marine Midland Mortgage Corporation). Since it began using EarlyIndicator to risk-rank its FHA and Veterans Administration (VA) loans last November, it has seen a significant jump in the number of workouts closed and across-the-board declines in delinquencies. As of April, for example, HSBC saw a nearly 20 percent drop in FHA [TABULAR DATA FOR FIGURE 1 OMITTED] delinquencies, compared with the same last year.

"We immediately realized a big savings in effort on the calling campaign side," says Dianne Dromerhauser, HSBC's vice president of default mortgage servicing. "I figure it shook out to approximately a 30 percent reduction" in calls, she says, and, this year alone has helped HSBC realize an estimated $340,000 in savings through increased workouts overall.

Nailing down risk

Created by an alliance between Freddie Mac and the Mortgage Guaranty Insurance Company (MGIC), Milwaukee, EarlyIndicator is the only truly comprehensive default scoring tool for conventional and government loans. It was designed to generate separate collection scores and loss-mitigation scores that risk-rank delinquent loans and help servicers increase the efficiency of their delinquency and default management programs. As a result, EarlyIndicator is enabling servicers to help more borrowers succeed as long-term homeowners - at no additional cost to the servicers or FHA - while promoting our mutual mission to help more borrowers avoid foreclosure and succeed as long-term homeowners.

Currently, more than two-thirds of Freddie Mac's portfolio of nearly 8 million mortgages is managed by servicers using EarlyIndicator. And, starting last year, a growing number of servicers began using EarlyIndicator and similar risk-management tools with their government loan portfolios as a result of new efforts by HUD to improve FHA loss-mitigation efforts.

As part of that effort, on April 1998, HUD issued Mortgagee Letter 98-18 giving lenders a green light to use automated risk-assessment tools, like EarlyIndicator, with FHA loans. The department also revised some of its loss-mitigation work rules so lenders using such risk-management tools could reallocate their resources and expand their use of loss-mitigation techniques, that "it is...

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