Success With Servicing Delinquent Loans

The study, Delinquency Dynamics: Servicer Effects, authored by GMAC-RFC researchers, examined the role servicers play in the rate of delinquency transitions, such as when loans go out of delinquency and into foreclosure. Using data collected by a GMAC-RFC business line that purchased and resolved seasoned, “distressed” assets, the differences in servicer transition rates and outcomes between paying and nonpaying delinquent loans were also examined.

The authors note a previous study that analyzed the delinquency transitions for fixed and hybrid pools of subprime mortgages of varying seasoning and origination credit quality. It was confirmed that the best predictors of transition into delinquency are origination FICO and seasoning, while loan balance and current LTV more effectively predict recovery from foreclosure.

Another prior study reportedly employed a random cross-section of 100,000 30-year fixed rate subprime mortgages originated between January 1996 and May 2003. The findings generally supported traditional expectations, such as that higher origination FICO scores are associated with lower probabilities of default, but indicate different variables associated with defaults than with delinquency. For example, higher LTVs appear to be associated more with missed payments than with defaults.

The GMAC-RFC researchers extended the basic structure described in both those papers by examining the likelihood of certain transitions for borrowers who both made and missed their last payment and explicitly controlled for servicer effect.

A sample of loans from pools purchased as “distressed,” where their histories contain at least 60 days into delinquency, were placed with a variety of nonaffiliated servicers. The researchers’ data consists of 23,039 monthly loan level transitions that were observed between April 2001 and February 2005, the report said.

In analyzing how servicers can influence transitions, the researchers observed recent payments. The authors affirm that there is “a significant difference in servicer behavior and loan outcomes between delinquent loans that are paying versus non-paying delinquent loans.”

While the probability of a transition into foreclosure is negatively associated with LTV, there is a significant level effect between borrowers who have made and those who have missed their last payment, according to the study.

The researchers said servicers are likely trying to be selective in their pursuit of foreclosure due to the ultimate impact of related losses. Foreclosing aggressively on deeply delinquent, but paying, borrowers would only bring forward potential losses that might otherwise be mitigated over time.

Deeply delinquent borrowers who made their last payment are also less likely to become current than those who missed their last payment entirely. This is likely because nonpaying borrowers are more of a target, than paying borrowers, for call campaigns, payment plans, and other accommodations, the study said.

“Servicers can have specific, strong impacts on transition rates and delinquency duration times, particularly between deep delinquency and foreclosure,” the authors said.

In looking for differentials explained by controls for two servicers, the researchers examined the probability of a loan transitioning from a 90+ days past due to foreclosure and current statuses by LTV levels.

One of the servicers appears to more aggressively pursue foreclosure and achieves a lower likelihood of bringing borrowers to current status.

The finding suggests that each servicer has a systematically different approach to borrower selection/identification and timing of foreclosure and that as a borrower’s equity diminishes or becomes negative, the differential between other factors diminishes, the report said.