This hardly seems fair to the rest of us that dutifully pay our
mortgage bills b/c we were lucky to keep our jobs.

Forestalling Foreclosure
By Barbara Kiviat Wednesday, Dec. 31, 2008

http://www.time.com/time/magazine/ar...869202,00.html

If you think subprime lenders are the loan sharks of real estate, then
loan servicers--the outfits that collect mortgage money and run the
books--are the enforcers. Their job is to keep the dough coming, no
matter what. Yet Ocwen, one of the nation's largest servicers of
subprime loans, has rewritten its role as the heavy and may have an
approach to modifying delinquent loans that could slow the wave of
foreclosures undermining the economy.

Last year, nearly a million houses were lost to foreclosure. That
number could easily rise by millions over the next few years,
promising more economic pain. The big problem is that no one has
figured out a systematic way to stop the rot. Federal agencies and
private lenders have rolled out one loan-modification program after
another--scattershot and largely timid attempts to make existing
mortgages more affordable and keep neighborhoods intact. (See the top
10 financial collapses of 2008.)

Then there is Ocwen, which has already revised 16% of its 340,000
mortgages, in many cases cutting monthly payments 20% to 40%. Based in
West Palm Beach, Fla., the company handles some of the worst loans
Wall Street kicked up during the housing boom and isn't about to win
any popularity contests among consumers--in the past, it's been the
target of complaints about unresponsiveness and excessive fees.
Nevertheless, good ideas can come from unlikely places, and as more
borrowers--including a growing number with prime loans--fall behind on
payments, there are lessons to be learned from the firm that has done
more than almost anyone else to keep struggling homeowners in their
houses.

Executives at Ocwen used to think, as those at any mortgage servicer
would, that the solution to a delinquent loan was to create a plan for
homeowners to catch up on past payments. When house prices were rising
and refinancing was easy, that generally worked, even though it often
meant higher monthly payments. But in early 2007, as housing values
plateaued, then plummeted, Ocwen saw the percentage of homeowners
defaulting a second time climb from 25% to 36%. "We realized we were
going to have to make some adjustments," says Ocwen president Ron
Faris.

So the company reprogrammed its computer models, which determine how
to extract the most value from each loan, to allow much more
substantial changes--lowering a mortgage's interest rate, docking its
principal balance, converting an adjustable rate to a fixed one,
stretching out the life of a loan. With many mortgages "upside
down" (when the loan is larger than the home's current value) and the
economy sagging, changes often have to be drastic to make the math
work, but Ocwen has largely found a way, devising an affordable
payment plan 90% of the time.

What really sets Ocwen apart, though, is its vigor. From doing just a
couple of hundred modifications a month in the first half of 2007,
Ocwen was up to 4,000 a month by the beginning of 2008, with 77%
involving a reduction of the interest rate and 20% including a
permanent write-down of the principal balance. Is it working? Six
months after receiving an Ocwen modification, 21% of homeowners have
again fallen behind on their payments by 60 days or more. That
compares with a 37% redefault rate nationally, according to data from
federal regulators--a figure that also includes much more stable prime
loans.

Principal write-downs are practically unheard of elsewhere--even
though they might very well be the best long-term solution for people
who owe more than their mortgage is worth, and they help the broader
picture too. "That debt overhang is a big drag on the economy," says
Alan White, a Valparaiso University professor who studies loan
modifications.

The motivation for modification isn't so much social responsibility as
the pursuit of profit; when loans go delinquent, the servicer makes
less money. Most of Ocwen's business is in collecting on subprime
loans, so its portfolio has been hit hard. Nearly a quarter of the
loans it services were behind in November, up from just 8% at the end
of 2006. And while Ocwen doesn't own those loans, it still loses out
when people don't pay on time, since the company has to temporarily
front money to investors to make up for the shortfall. "Despite the
fact that they're doing it in their own interest, you can't dismiss
it," says Rod Dubitsky, head of asset-backed-securities research at
Credit Suisse, whose assessments show that aggressive modifications
keep people in their homes longer.

Ocwen has also answered a key question for other would-be modifiers:
whether it's possible to pass major losses to investors without
getting sued. Paul Koches, Ocwen's general counsel, holds that the
company is not only permitted to take such steps but obligated to--if
that's what it takes to squeeze the most money out of a loan for the
long term. That's the case executives make when angry investors call--
and they do call, especially when a principal reduction chokes off
cash flow in a particular month.

Make no mistake: Ocwen has a nearly messianic focus on the goal of
maximizing returns for investors. "In most cases, that means keeping
people in their homes and getting them to pay their mortgages," says
Ocwen CEO Bill Erbey. In foreclosure, investors typically recoup only
60¢ on the dollar.

In a way, Ocwen was uniquely situated to jump ahead on modifications.
Erbey, who used to run General Electric's mortgage-insurance
operation, started buying nonperforming loans with his partners in the
early 1990s. Ever since, Ocwen has been refining its computer models--
we're talking sophisticated stuff, like vectors and artificial
intelligence--to better whip delinquent loans into shape. When the
housing slump hit and defaults started to rise, Ocwen wasn't some
afterthought unit of a mortgage originator caught with its pants down;
it was in its element, in a position to immediately scale up.

That's why, unlike a lot of loan-modification programs, such as those
rolled out by Citigroup and IndyMac Bank, Ocwen's doesn't use broad
guidelines--for instance, assuming that homeowners should be able to
contribute 38% of their income to paying their mortgage. When Ocwen
rewrites a loan, it starts from scratch, with an agent at one of its
four call centers--two in Florida, two in India--following an adaptive
script to reconstruct a borrower's financial data. (The script
changes, based on not only what a borrower says but also how he says
it; since hiring a director of consumer psychology last summer, Ocwen
has been handling embarrassed callers differently than, say, angry
ones.)

"I had to show why I was making less money," says John Archon, a
manager at a roofing company in Florida, whose paycheck took a major
hit in the housing bust. He and his wife now share a car, are energy
conscious and "eat a whole lot more hamburgers than steak." Ocwen
knocked the interest rate on their 30-year fixed-rate mortgage from
9.3% to about 6.9%, saving the couple $500 a month. Getting those new
terms was a stressful process, says Archon, but he "took the
standpoint that they were weeding out the people who were not that
serious."

Ocwen also breaks ranks with industry practice by modifying loans for
people who bought houses as investments. Again, that's in Ocwen's self-
interest: those loans account for 17% of its portfolio. In bucking the
general disdain for bailing out investment properties, Ocwen realizes
that cash is cash, whether it comes from an owner-occupied mortgage
payment or one fed by rent, and that a foreclosure displaces a family
and blights a neighborhood whether the occupants are owners or
tenants.

Which just goes to show that moneymaking and good economic policy
aren't necessarily incongruous. As much as capitalism--especially in
the mortgage industry--has gotten a bad rap of late, it might just
prove useful yet.