“Seven out of 10 troubled mortgage borrowers remain without a plan to work out their loans despite increased industry efforts to help them, according to a new report from a coalition of state attorneys general and banking regulators.” from a Washington Post article

If we look at actual industry efforts to help troubled borrowers, it doesn’t surprise me that many borrowers don’t have a plan and don’t want to talk to their lender.  When payments start to show up late or aren’t made at all, lenders have a given plan of action to get those payments current as quickly as possible, the lender doesn’t just sit waiting for something to happen.

Each lender is going to handle their collection efforts differently, but a common approach will be a reminder letter sent to the borrower if a payment hasn’t been posted by the monthly loan due date, perhaps followed by a phone call later in the month.  That’s fine if there’s a history of slow pays and that process seems to be enough to keep the account moderately current.  Keep in mind that loan servicers make a good percentage of their income from late fees, so a consistent slow pay might not really be considered such a bad thing.

When payments go from slow pay to really slow pay, or maybe no pay, collecting those payments then becomes the job of people specializing in collections.  Their job is to get the account current and they’ll call repeatedly, send letters and say pretty much whatever they can to get the borrower to make payments or partial payments.  The mortgage collectors I’ve known have all been pretty nice people on a personal basis, but from the stories I’ve been told, they aren’t very nice when they’re looking for payments.

So when there’s a loan that starts going from occasional slow pay to consistent slow pay all the way to technical default, what has the borrower experienced?  Mild, helpful reminders that they need to make their payments when they’re slow pay followed by increasingly aggressive collection efforts as the loan gets further and further behind.  Most people would probably believe that it isn’t going to get magically better, but that collection efforts would continue at the same level, or increase, as time goes on.  Thus, it’s time for lender ignore mode which is undoubtedly less painful.

There are an awful lot of loans out there that have either experienced an interest rate reset, or will experience such a reset.  Lender communication with the borrower on loans that are likely to have possible problems along with re-evaluation of existing loan characteristics/underwriting standards would be the beginnings of a loan triage approach.  So loans can’t be saved so don’t waste energy on them, just proceed with the inevitable.  Some loans can be re-worked to allow the borrower to stay in the property with lender concessions and other loans can be re-worked without significant lender concessions.  Early communication and a change in how that communication is approach could alter the common lender ignore mode many borrowers fall into.

You can’t mandate or legislate borrowers into doing something.  You can’t effectively require lenders to try to coerce borrowers into doing something.  Lenders can, however, alter their policies to provide more of a cooperative approach with their borrowers rather than the increasingly hostile/demanding approach used for so many years.