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Reputation Risk Adds to Urgency on Loss Mitigation
By Ted Cornwell
Lenders know that foreclosure and REO disposition usually add up to big losses, but the biggest loss lenders may face from rising foreclosure rates is to their reputation.
And that makes getting loss mitigation and foreclosure prevention right even more important, according to federal banking regulators.
Lately, comptroller of the currency John Dugan has been taking the lead among federal banking regulators in urging lenders to beef up foreclosure prevention strategies. Recently, the Office of the Comptroller of the Currency issued a report, "Foreclosure Prevention: Improving Contact with Borrowers." The title pretty much sums up the theme. Getting in touch with borrowers early in the delinquency process is the best way to help homeowners steady the ship before their situation becomes so dire that they cannot recover.
And more and more servicers are taking extra efforts, including hiring door knockers to reach homeowners who won't respond to phone messages, to try to get borrowers engaged in foreclosure prevention negotiations.
Foreclosure prevention isn't just about mitigating financial losses, however. It's also about maintaining a bank's reputation in the community. If you've spent perhaps millions of dollars over the years on advertising and corporate philanthropy to enhance your image, you don't want to see your firm's name sullied by allegations of abusive lending or "predatory" loan servicing. In the minds of the public, foreclosure often means that innocent people get kicked out of their homes so the bank can make a profit. While nothing could be further from the truth in most cases, that doesn't sell well when local reporters and camera crews show up to document the heartless eviction of someone who has fallen on hard times.
In addition, a high level of defaults can make it difficult for a seller or issuer of securitized loans to continue selling product into the secondary market, the OCC notes. To top it off, a high number of defaults can negatively affect a lender's servicer rating from the rating agencies.
People who've been in the industry a while all remember the name Fairbanks Capital, and probably for the wrong reasons. That firm lost its reputation amid allegations of improper servicing and collections practices and had to change its name as part of an overhaul and change in ownership. A bad reputation is something that everyone wants to avoid. And proactive foreclosure prevention is a good way to start.
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