A white paper from Mortgage Cadence, Denver, suggests lenders should adopt aggressive new loss mitigation strategies to reduce risk and streamline loan modifications.

The paper, Preparing for Loan Modifications; a White Paper on Enterprise Loss Mitigation Solutions that Could Save Your Business, said servicers and lenders can successfully meet requirements to engage in loss mitigation and significantly improve their loan modification success rate by incorporating comprehensive technology and data analytics solutions to address these challenges.

Those technologies, the paper said, includes effective rules-based analysis, actively reaching out to troubled borrowers, automated workflow and extensive real-time management tools.

"The mortgage industry is under extreme pressure to help homeowners who are struggling to pay their mortgages," the paper said. "Apart from the social implications of allowing mortgage borrowers to lose their homes, a failure to thwart the surge in foreclosures threatens the entire U.S. economy...the need to engage in loss mitigation, heightened regulatory scrutiny, associated risks and the current failure rate of loan modification programs create a number of challenges for servicers and lenders."

Primary challenges associated with loss mitigation in the current economic climate include the potential for treble damages for failure to engage in loss mitigation, and the failure rate of current loan modification efforts. Lenders are forced to handle increased volumes of defaults, the expensive nature of not doing loan modifications properly and lack of consistency in the process.

The paper cites three key actions that mortgagees must take to avoid assessment of treble damages for failure to engage in loss mitigation. "First, mortgagees must ensure that the loss mitigation evaluations are completed for all delinquent mortgages before four full monthly installments are due and unpaid. Second, mortgagees must ensure that the appropriate action is taken based on these evaluations. Third, mortgagees must maintain documentation of all initial and subsequent loss mitigation evaluations and actions taken."

The paper advocates enterprise loss mitigation solutions to reduce risk while achieving an improved return for servicers and lenders compared to foreclosure.

"Technology must be flexible, providing the ability to easily modify criteria as market conditions, investor and regulatory requirements or lender's credit policy dictates," the paper said. "The technology solution must proactively engage troubled borrowers. This includes outbound marketing that provides personalized communications that generate a response from the troubled borrower. Lead tracking and automated follow up is incorporated with the ability to identify future delinquency risk while taking steps to mitigate."

The paper also advocates automated workflow as central to core strategy. "Servicers need to have direct, personalized communication with borrowers throughout the process, while automating repetitive, redundant processes and providing automated data analysis throughout the process," it said. "Automation can be accomplished utilizing a rules-based decision engine as well as third-party data integrations that can be automated ."

Benefits to such as strategy includes maximum workout options; enhanced consistency; greater accuracy, significant loss reduction, reduced compliance risk, superior technology advantages; and integrated document preparation and delivery.