Banks Reducing Principal with Help from Specialty Servicer

Under pressure from the government the banks are seriously going about the work of reducing principal on mortgaged loans for those threatened with foreclosures. For this they are taking the help of servicers specialized in the line – ‘specialty servicer.’

This has led to the sprouting of innumerable such servicers to tackle the new type of task of modifying loans by bringing down the principal. These underwater borrowers make up 5% of the total number of mortgages as per the findings of Mortgage Bankers Association.

Rick Smith of Marix said, "Some lenders are so large they can’t handle delinquencies efficiently. They’re reaching out to (firms) that specialize in non-performing loans."

The banks are satisfied with this outsourcing as they think that the problem is only for the time being. For this they do not want to increase the number of their permanent staff. Smith explained, "If you hire 500 people to handle it and then the economy improves, then you’re overstaffed by 500."

The banks are now able to cut down on the principal for some reasons. Often the investors buy up whole swaths of dubitable loans. These investors or hedge funds and other entities do not themselves service the loans. Their prime aim is to see that the mortgages start laying eggs once more – irrespective of the eggs being gold, silver or even copper. So these special serving groups are engaged, given plenty of leeway to get the loans running once more.

Shaun Ahmad of RoundPoint Financial Group based in North Carolina said, "We take a different approach to servicing. We come up with better solutions." Of these one of the main steps is to slice off the part of the principal due so that the borrowers are no longer underwater with the houses being valued at less than the loan due amount.

Gagan Sharma of BSI Financial said, "Our clients would rather do a principal-reduction than an interest-reduction workout. Many bought the loans at discount so they’re happy to pass the savings down to consumers."

This is preventing borrowers from walking away. They are now motivated to keep the mortgage payments running. If the economy improves and prices of properties start to increase then the owners can pocket profits when they decide to sell it.

The traditional servicers did not want to bring down the principal because the investors actually owning the loans shy away from immediate losses. It resulted in only fewer than 2% of trial modifications becoming permanent by having their principals reduced.