Understanding modification programs and options is the first step to a new niche

Joe Dombrowski, executive consultant, Fiserv

As published in Scotsman Guide's Residential Edition, May 2010.

Mortgage brokers and the rest of the residential lending community have experienced a tumultuous past few years. Home equity has taken a major hit, and although it appears new foreclosures may be slowing, it's unlikely the frenetic lending atmosphere of earlier this decade will return any time soon. This, however, isn't necessarily cause for despair.

Mortgage brokers can find new opportunities in the defaulted-loan space. You may wonder how you can do business with borrowers who are underwater or having problems making their loan payments. You also may wonder how you can tap into a somewhat-confusing set of programs aimed at stemming foreclosures.

Brokers can serve as workout agents, prepare documents and collect data necessary to pursue workouts for borrowers. Generally, this information is the same as information used to originate loans.

As you consider your options, realize that loss mitigation includes processes similar to those involved with standard loan origination. The difference is that loss mitigation focuses on qualifying borrowers for programs that can help them avoid losing their home. From a loan servicer's perspective, finding workable options often is crucial amid widespread legal moratoria on foreclosures.

Retention or liquidation

Any loss-mitigation effort can be called a workout. You can think of it as a fact-based decision about the viability of loan retention versus loan liquidation. Here's the difference:

• Loan retention: These workouts allow borrowers to keep their home, and they usually involve a type of modified repayment agreement and adjustment to loan balances, terms or both. Refinancing existing loan terms is another retention option.
• Loan liquidation: These workouts result in borrowers losing their home through a negotiated process instead of through foreclosure. Liquidation options may range from selling the home for less than the loan balances the borrower owes -- also called a short sale -- to another borrower assuming the loan.

Every workout option begins by establishing borrowers' financial picture and the home's realistic value. The next step is determining the options for borrowers' specific situation.

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