Ocwen Financial Corporation, a national subprime mortgage servicer, reported that delinquencies on the subprime mortgages it handles flattened or declined this summer, largely due to its technology-enhanced loan modification program. According to the company, its results represent a “ray of hope in the subprime crisis” and suggest a practical approach to keeping homeowners in their homes and protecting lenders’ and investors’ income.

The Florida-based financial services outsourcer said that for the loans it services, delinquency rates in every category (60, 90, and 90+ days) have either declined or remained flat over the last three months. The company said this is the first sign of stability in Ocwen-serviced loans since the inception of the subprime crisis in 2007. Through its subsidiary, Ocwen Loan Servicing, LLC, the company services approximately 350,000 mortgages, about 85% of which are subprime.

“While it’s still too early to signal an end to the subprime mortgage crisis, this represents a welcome reversal of spiking delinquencies,” said Ronald M. Faris, Ocwen's president.

Ocwen's news comes at the same time the Mortgage Bankers Association (MBA) released its delinquency survey results for the second quarter, showing 39-year record highs for national delinquency rates.

According to Faris, Ocwen’s success is due in large part to a sophisticated approach to modifying loans and a commitment to loss mitigation – and that, in turn, benefits all parties. “We believe that by preventing foreclosure, we create win-win solutions for everyone – the homeowner is able to stay in the home, and lenders and investors continue to receive income,” explained Faris.

From the onset of the subprime meltdown, Ocwen has undertaken proactive initiatives to help homeowners in distress, the company said. Since August 2007, the firm has increased its home retention consultant staff by 65 percent, and achieved loan workouts avoiding foreclosure for over 58,000 homes.

Margery Rotundo, Ocwen’s SVP in charge of loss mitigation operations, explained, “Assuming the average household we serve is 3.5 persons, that means in just one year we’ve helped keep the roofs over the heads of 200,000 Americans – the equivalent of a mid-sized city like Richmond, Virginia or Modesto, California. We are very proud of our contribution toward the preservation of home ownership for so many families.”

Loan modifications, or “mods” as they are called in the servicing business, actually benefit both the homeowner and the loan owner, typically a securitized mortgage trust, Rotundo explains. “Properly implemented mods benefit investors in MBS trusts in transforming a non-performing asset into a cash flowing asset again. Foreclosure is the worst alternative – the borrower loses the home, and there is almost always a net loss to the trust on the foreclosure sale. We design mods to achieve the maximum net present value of the loan asset for the investor while saving the home for the borrower, truly a win/win solution.”

Ocwen says robust technology is the key to its success with loan modifications. The process is highly particularized, and must be tailored to the specific facts and circumstances surrounding the homeowner’s financial situation, the terms and conditions of their mortgage loan, and the current value of the property. Through proprietary technology incorporating artificial intelligence, rules-based systems, scripting engines, and net present value cash flow models, Ocwen is able to determine whether a loan modification would result in cash flow to the investor that exceeds the likely liquidation proceeds from a foreclosure and the homeowner’s willingness and ability to stay current on the new modified payment. In designing the optimal loan modification that achieves the highest net present value, Ocwen utilizes interest rate reductions, principal forgiveness, extensions to the amortization period, or a combination thereof. The technology allows Ocwen to apply common elements across a range of modifications, while still allowing for an analytic approach to each individual loan.

In addition to its aggressive loan modification program, Ocwen has been an active supporter of homeownership preservation initiatives and community outreach projects. Ocwen said it endorses both the HOPE NOW Alliance servicing guidelines for foreclosure prevention, as well as the loan modification program recently announced by the Federal Deposit Insurance Corporation (FDIC) for mortgages serviced by IndyMac Federal Bank.

“The FDIC is setting a useful precedent for the industry,” Faris said. “We have previously adopted many of the same features in the IndyMac mod program and are incorporating other aspects as well.”