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Outsourcing Loss Mitigation Services Is A Win-Win Situation

Service to bank customers on the brink of losing property benefits banks, insurers, and the clients themselves


September 7, 2000
Copyright © 2000 CARIBBEAN BUSINESS. All Rights Reserved.

Puerto Rico Loss Mitigation Inc. and International Loss Mitigation Inc. are two local, private companies serving Banco Popular and R&G Mortgage customers, respectively, who are on the brink of losing their home.

The service allows clients to keep their homes or sell them and retain part of the equity they have invested.

As a result of a 1997 federal mandate that orders mortgage banking institutions to help clients to save their homes from foreclosure, Hiram Rodriguez decided to establish both companies to conduct the processes for the local banks.

The loss mitigation program was first started in 1995 by the Federal National Mortgage association (Fannie Mae). The following year, the Housing & Urban Development Department (HUD) also included a loss mitigation program. Both agencies asked the mortgage industry to include a loss mitigation program to help clients save their homes.

In 1997, President Clinton signed a presidential order, which made it mandatory for the mortgage industry to include a loss mitigation program. Last January, HUD issued mortgagee letter 2005, called "Loss mitigation, a comprehensive classification of policy and notice of procedural changes." The 2005 HUD letter clearly states government policy concerning loss mitigation.

For example, HUD says that when mortgagees fall two payments behind, banks must write them to offer assistance. "The problem is that in Puerto Rico, most people receive the letter and don’t even read it because they think it’s just another warning letter from the banks," Rodriguez said.

Most local cases fall behind in payments due to a drop in income for two reasons; marital problems (divorce or widowhood) or loss of employment. Although there are cases at all economic levels, the majority involve lower-middle to middle class individuals with homes in the $60,000 to $80,000 range.

Rodriguez has 25 employees handling Banco Popular cases, with 16 in the field, literally knocking on peoples’ doors to offer the service.

"The response is tremendous, 75% of the people visited or contacted through a letter from us, call us immediately," Rodriguez said.

The federal law allows for six alternatives, provided the person qualifies:

  • A new payment plan is established
  • The existing loan is modified by extending a new term to the mortgage
  • In Federal Housing Administration (FHA) loans, up to 12 monthly payments may be advanced by FHA (the borrower will not pay any interest to FHA and repayment of this advanced money is not due until the mortgage has been totally paid)
  • A pre-foreclosure sale in which the owner can look for a buyer (the buyer pays the mortgage and gives the owner the balance of the money)
  • The buyer assumes the mortgage and gives the difference to the owner
  • The owner voluntarily hands over the property and after paying the mortgage, the bank returns the difference

"Most people prefer a payment plan because average delinquency is one to four months," Rodriguez said.

Rodriguez’ biggest satisfaction is seeing teary-eyed faces become happy when people find there’s a solution to their problem. "Unlike the States, where people don’t mind losing their homes as much because they can always move to another state, in Puerto Rico, people cling to their homes and fight not to lose them," he said. Last year, Rodriguez assisted 443 persons who saved their homes through his intervention.

Rodriguez said that outsourcing loss mitigation services is a win-win situation for everyone. The service requires highly specialized personnel with knowledge of foreclosure, bankruptcy, mortgage loans, and collecting. Different banking divisions would normally handle the different aspects. However, grouping this knowledgeable pool of people results in savings for banks.

Additionally, the usual cost to banks when they acquire a foreclosed property averages $2,500 due to vandalism suffered by the property. Loss mitigation overcomes the anger that results in destructive behavior.

Proof of the program’s success is Banco Popular, which originally signed for a year, renewed the contract for five years. R&G, which started the service with Rodriguez and his partner Martin Vargas in July, signed on for two years. Four employees work on the R&G cases, with an additional four to be contracted next month.

Rodriguez said the situation also benefits insurers who guarantee FHA or Veterans Administration loans, because they do not have to repay the bank for the foreclosed property.

This Caribbean Business article appears courtesy of Casiano Communications.
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