NonPerforming Note Servicing

[Johnathan Norman]

I'm considering making the jump into the notes biz and after reading a few books I noticed some people suggest using your servicing company for all communication with the borrower.  The logic is that servicing companies know all the rules and this will mitigate legal risk. Other books however suggest directly contacting the borrower to work out a solution to get the note performing and then hand over the work to a servicing company. The argument is that the servicing company is unlikely to be as effective and focused on the results of the negotiation as the note owner. 

For those here who have experience in these matters I'd love to hear your thoughts.   

[Mike Hartzog]

We have tried a number of different approaches and have found that in non-performing scenarios, using servicers is not as effective as talking directly with borrowers.  I think servicers can be very effective in performing and sub-performing scenarios when a borrower misses a payment, but for borrowers who have not paid in many months, the servicer is going to come across a lot like a bank does.   In other words, the same type of thing the borrower has ignored for months.

For NPNs, we typically board them as "client managed" so that if the borrower calls the servicer, they are directed to contact us directly.  We kick things off by having our attorneys send a demand letter which starts the legal process and let's the borrower know that we are serious.  At the same time, we engage in borrower outreach with a soft and friendly tone.  We use a 3rd party who specializes in borrower outreach to do the skip tracing and make some phone calls.  We also send a letter which is informally worded and does NOT read like it comes from a bank.  If we get no results within a couple of weeks timeframe, we follow-up with a door knock.  In many cases, the demand letter alone will get the dialogue going, but sometimes it takes the full combination of carrot-and-stick approaches to get the conversation started.  While this approach works for us in the vast majority of cases, there are always those that simply refuse to talk, and we have the legal process to deal with that.  

Regarding staying out of trouble, my simple rule is to follow the rules/laws, be nice, be respectful, and never use threats or coercion of any kind.  The tone should be more along the lines of  "Hey, we have a problem here which is headed toward a legal solution.  Let's talk and see if we can find a better solution which works for everyone.  We have helped others and we want to help you too if we can."  This type of approach goes a long way toward building trust and mutual respect, and this can help keep things on track down the road after a successful workout is achieved or even in cases where a workout is not possible and the borrower has to surrender the property.