Our Key Insight
Analysis of borrower default behavior within a financial option framework enables us to structure contract modifications that maximize value to the lender – while also leaving the borrower better off than if the house were lost to foreclosure.
See our white paper - Maximizing Recovery Value by Avoiding Foreclosure: A Win-Win Approach.
Our Solution
Our decision algorithms process borrower, property, and market data in a cost minimizing sequence of data gathering and decisioning. At each step we calculate the value maximizing option for the lender – foreclosure or continuing to refine the modification contract offer. We actively market the modification opportunity to borrowers and qualify them by gathering up-to-date information on their income and the value of their property. Finally, if the value of the modification package exceeds the foreclosure value, we “sell” the deal to the borrower and implement the modification. See the system overview flowchart here.
Our Technology
The Recovery Company has a sophisticated workflow management and analytical system that brings efficiency and consistency to the business of working out delinquent home loans. Our analytical system calculates expected net present value of the options available to the bank so as to insure that decisions are always in the bank’s best interests. This is not just an exercise in recalculating the present value of promised cash flows.
Our system uses appraisals to determine the value of the house in the hands of the borrower and local market data to determine the foreclosure present value of the asset. This involves looking at comparable bank owned property sales relative to market values, realistic foreclosure timing, the current inventory of houses for sale, price trends and other local economic variables. 
We use econometrically derived forecasts of home prices for local markets. This enables us to evaluate the likelihood of future default as a function of loan to value for proposed modified loan terms. Thus we can take into account the incentive effects of positive equity versus negative equity on borrower repayment behavior. This is important for maximizing expected actual cash flows and, equivalently, minimizing the expectation of future foreclosure costs from re-default.
Another unique feature of our system is its capability to account for and value appreciation rights granted to the bank by the borrower. Our system for fully capturing all the relevant features of these contracts in a standardized format will be crucial to market participants’ ability to value securitized pools of such rights. Before these markets develop, we will provide consistent model values for these contracts. Our model takes into account penalties for early termination, borrower incentives for sale or default, expected timing of payoffs, the path of house prices, and variance around the expected path.
More Information
See our distressed mortgage Fund Brochure here.
Watch a 6 minute video that demonstrates the optimization system using graphics here.
Our White Paper, "Quantitative Comparison of Alternative Loan Modification Strategies" explains how to use Monte Carlo Simulation to calculate the range of value gains from using our system versus Bank (HAMP) modification rules. For strategic defaults our system increases recoveries by 35% using our base case portfolio assumptions (across all scenarios the range is 19% to 47%).
See our Case Study of a failed bank modification from the pages of the Wall Street Journal.
Run demonstration calculations here. Call or email Ray Meadows for password.
Academic Papers:
"The Principal Principle: Optimal Modification of Distressed Home Loans, or Why Lenders should Forgive, not Forsake Mortgages."
"Strategic Loan Modification: An Options-Based Response to Strategic Default"