An alignment of interests may solve the oncoming foreclosure flood.

It feels as if every other article these days focuses on the effects of forbearance across various asset classes. From agency-backed paper to service non-QM loans, the consensus is there will be a drastic increase in overall foreclosure activity.

Although most industry professionals agree the increase in foreclosures may fare much better than the foreclosure tsunami of 2007-2009, the sheer volume of current defaults is staggering. As Kate Berry from American Banker writes, “[t]he percentage of loans in forbearance remains the highest for mortgages held on bank portfolios or backed by private level mortgage securities.” The risks are undoubtedly real.

You’ve undoubtedly heard the old proverb “the best time to plant a tree was yesterday. ”There are two main goals in planning for the upcoming waive of defaults. The overall goal is the alignment of interests of all stakeholders. The nuanced goal is getting to that point.

Let’s consider a procedure we can implement and follow so we are prepared and ready.

Complete Alignment of Goals

Our current market model assumes the following:

• Investors must get a return on their money as quickly as possible
• Default servicing companies only get paid when servicing defaulted loans.
• Attorneys must bill (usually at inflated rates).

Where does that leave us? Unfortunately, this complete misalignment of the respective parties’ goals will be the catalyst for another housing crash.

Thus, there must be a complete and total alignment of roles, goals, and actions of all parties—investors, default servicing companies, and their litigation counsel. Such an alignment will enable a unified asset positioning that will glide through any forthcoming crisis.

That said, mortgage-backed collateral allows for greater long-term equity accumulation than most other asset classes. It provides security for investors as well as wealth accumulation for borrowers. So, rather than positioning real estate as the next bubble to burst, let’s entertain a simple idea: The alignment of goals brings stability and prosperity for all involved.

Five-Point Plan

There are five major parts of the approach to a complete management of non-performing assets in your portfolio. Everything must be examined from the prism of where you want to be with your matters. You must have clearly identifiable goals, quantifiable procedures, and airtight implementation.

01 Documentation // Those with construction and development experience will appreciate this. Documentation management and storage is as important as a building’s foundation. You must know where the documents are, how they are stored, who has access to them, and when you can use them. Scanning is great, document management systems are amazing, and instantaneous cloud access is irreplaceable. However, the most important thing is “Where is the original?” Proper upkeep of original documentation is the necessary and indispensable foundation for successful default asset management.

02 Outreach // If you never ask for it, you are never going to get it. So, call, email, and send a letter. It’s that simple. Keep your borrower apprised of what is going on with the loan and how you can work it out. Litigation is an unpredictable, irrational, and unquantifiable event. Why go through it unless absolutely necessary? I assure you, no party benefits from the uncertainty of litigation. On one hand, the borrower’s equity is exhausted, leaving them with nothing. On the other hand, the investor is left with a judgment worth less than the underlying collateral.

The most profitable client for an attorney is the one who walks in and says: “I am going to show him.” All the attorney will hear is, “How can I help you put your kids through college?” Focus on your bottom line. At times, you are better advised to work out the issue on a personal level rather than involve the courts.

03 Litigation // You have your documents. Your affidavits and assignments are in order. Your outreach is not productive. Don’t waste your time going from one offer to another. Resolve it through court.

The best approach here is to file your complaint in the same form and substance as if you are seeking a judgment and dealing with the best opposition. Why wait and hope that it will not be answered or go on default? Remember, the law is on your side. You have a valid debt and evidence of default—you win. There is no rhyme or reason why you should feed your litigation piecemeal. Come out strong right from the beginning and take charge of your litigation.

04 Attorney // The most important aspect of the attorney/client relationship is the complete alignment of goals. Judicial foreclosures have a number of goals (i.e., minimization of litigation expenses, swiftness of procedure, fruitful negotiations, successful appellate process, etc.). The driving force in this very intimate relationship is the alignment of goals.

Unfortunately, many times, alignment of goals gets lost in the grind of daily court appearances. Who is making your appearances? How is your attorney’s position reflecting your future? Why is the case not moving? These questions must be asked and answered daily. If you hear, “this is how it is” from an attorney, you must immediately switch over all your cases before the call is even over. Simply, your goal must be the goal of your counsel.

05 Oversight // “Trust, but verify.” This was one of Ronald Reagan’s favorite lines. Suzanne Massie, a very influential American scholar of international acclaim, taught it to him. All the points above boil down to this: The most successful default portfolio managers will accept this as their mantra. There is no better way to effectively execute on your non-performing assets than to verify the actions of your processing, litigation support, and attorneys. Responsibility and accountability are the cornerstones of your strategy.