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» possible strategies to sell/manage the distressed properties . . . . As servicers manage their backlog of foreclosures, asset management is becoming an important skill. The ability to dispose of REO properties quickly and efficiently has become a critical function among servicers . . . . So what can servicers do to mitigate their post-foreclosure losses? • If properties remain occupied after foreclosure, servicers can offer homeowners "keys for cash" with a short-term deadline. In some cases, it may make sense to allow former homeowners to rent the property while it goes through foreclosure – the theory being, it is better for a house to remain occupied than to sit vacant. The final alternative is eviction. • Once properties are vacant, servicers have several options. In some cases, servicers may elect to invest in some repairs and renovations and rent properties until market conditions improve. In other cases, servicers could opt to sell properties individually or in bulk. • Some servicers prefer to handle individual sales internally while others prefer to outsource sales to real estate firms. In the case of bulk sales, some investors may buy small (five to 10 houses) or large portfolios of foreclosed properties, with an eye toward renting and eventual sale. POINT— COUNTERPOINT REGIONAL SPOTLIGHT the industry have had a material impact on the financial health of these institutions. As lenders, servicers, and other participants adapt to the new landscape, mortgage executives should consider addressing a number of key strategic challenges in order to survive the current environment and thrive in the future. . . . Default management, once a relatively routine concern, has become a highly vexing challenge for servicers, investors, and regulators. The scale and variety of problems stemming from delinquencies and foreclosures since the financial crisis are considerable and have seriously bogged down the industry on a number of fronts. Although the percentage of serious delinquencies have begun to decline across various risk categories, they are still at historically high levels . . . . Due to the high level of risk, quickly addressing foreclosure backlog that is clogging the system is required. In order to be effective in the future, firms should be considering not only to meet the new standards but also improving the quality control process and managing the cost structure. As servicers look to strengthen their default management and loss mitigation strategies over the next several years, it is useful to think about the issues through the stages of the default life cycle: • The predefault stage, where borrowers are either current with their mortgage payments or no more than 30 days late. Here, the chief tasks are to identify potentially delinquent borrowers, using predictive analytics, and actively monitor them. • The default stage, where borrowers are 30 to 90 days late with their mortgage payments. The goal in this stage is to help delinquent borrowers avoid foreclosure. • The postdefault stage, where borrowers are at least 90 days late with their mortgage payments. The priority here is to comply with government modification programs or determine the best BEST PRACTICES The U.S. residential mortgage industry is undergoing one of the most wrenching transformations in decades. Record volumes of delinquencies and foreclosures, intense regulatory scrutiny, and legal woes on many fronts continue to hobble the industry. To complicate matters, the global economy is stuck in a low-growth environment, and there are few signs that the housing market will experience a quick recovery anytime soon. The sheer scale and complexity of the challenges facing mortgage lenders, servicers and investors is simply unprecedented. This pain is being felt globally across the phases of the mortgage life cycle. . . . These issues across the mortgage value chain have manifested in lower profitability in the industry. For instance, the average return on average equity (ROAE) for the top four mortgage lenders in the U.S. has dropped from a high of 16.94 percent in 2006 to 7.34 percent in 2011. Of course, not all of this decline is solely attributable to mortgage operations, but the problems affecting —John Alkire, Carrington Mortgage Services THE BIG PICTURE By the Deloitte Center for Financial Services For every distressed loan a servicer comes across, there is a unique story. Taking the time to figure out what that story is and using that information to best meet the needs of the borrower can make a huge impact on whatever happens next—and how it will ultimately affect your bottom line. INDUSTRY INSIGHTS Mapping a Path to Profitability COVER STORY go to the borrower's door—whether that is the property in default or an alternate address—and re-establish the lost contact. The ultimate goal is to find a method that creates the best resolution for all parties involved. Gaining the trust of the homeowner is paramount, and one critical success factor is partnering with a strong and stable service provider. It is imperative that servicers partner with a company that can be trusted, a company that has been in the business and knows the fine details involved in the process. When there is a third party involved that understands the cumbersome regulatory requirements and will handle the legal aspects entailed, the servicer or lender can return its focus to its core business. By placing or using existing agents in the field, our industry can come full circle and re-establish the intimate dialogue that used to be central to our loss mitigation strategies. These agents are able to listen to the homeowner's story and determine the correct way to remedy the situation. Before putting them through our models, waterfalls, and workflows, let's meet them on friendly ground— their home—and demonstrate our commitment to them. Encouraging a real relationship and building trust enables us to more effectively understand circumstances, remove fear, and effectively mitigate loss. VISIT US ONLINE @ DSNEWS.COM . . . To put the mortgage industry back on the path to profitability, many executives face a daunting list of challenges to address . . . . [A] critical determinant of achieving the desired results will be how well the organization is able to execute and manage the operational challenges across the mortgage life cycle on a consistent basis. 51

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