West Palm Beach, Florida-based Ocwen Financial Corporation, one of the nation’s largest servicers of subprime mortgages, has reported solid success with its program to modify substantial numbers of troubled loans in a way that avoids redefault, and keeps borrowers in their homes and loans performing for investors.

Ocwen takes a loan-by-loan approach and uses proprietary, scalable technology and analytics in its modification program. According to a recent Wall Street Journal report, Ocwen is one of very few loan servicing companies that is retooling mortgages to lower the loan balance, as well as the interest rate, in order to keep borrowers in their homes. According to Ocwen EVP Paul Koches, reducing the principal on mortgages is “a last resort,” the Journal said. Still, as of Sept. 30, Ocwen had reduced the amount owed on 10,884 delinquent mortgages, or about 20 percent of all loans modified by the company this year.

At the six-month mark, the 60-day delinquency rate on Ocwen-modified loans is 24.6 percent, the company said. Ocwen’s results contrast with data released by the Office of the Comptroller of the Currency (OCC) this week, which shows that, overall, 53 percent of borrowers fell behind on their payments again six months after their loans were modified.

“The salient issue is not the efficacy of loan modification as a loss mitigation tool, but whether mods are properly designed,” said Ocwen CEO William C. Erbey. “Our loan approach achieves the twin objectives of keeping homeowners in their homes and maximizing the net present value of the mortgages to the investors who own the loans.”

Ocwen’s president, Ronald M. Faris, added, “Proper loan modifications require a highly particularized process — one tailored to the specific facts and circumstances surrounding the homeowners’ financial situation, the terms and conditions of their mortgage loan, and the current value of the property. The process involves robust technology that is scalable to handle the unprecedented volumes of delinquencies.”

“We concur with Federal Reserve Chairman Ben Bernanke that initiatives to reduce preventable foreclosures should be high on government and private sector agendas — and also agree wholeheartedly with Federal Deposit Insurance Corporation Chairman Sheila Bair that it would be dangerous to read too much into overall re-default rates for modifications,” said Erbey. “We believe she is correct that the re-default problem lies with how some servicers are doing modifications, not with the concept of modification. It’s possible to do modifications right. It’s challenging, but we’re doing it — and doing it in a way that’s scalable.”

Erbey notes that Ocwen has a longstanding commitment to loss mitigation and foreclosure prevention. Even though the company’s portfolio is more challenging than other servicers’, losses on the subprime mortgages it services are half the industry average, the company said.

Over the past 10 years, Ocwen has invested more than $100 million in designing and refining its REALServicing and REALResolution systems for loan modifications. The technology uses artificial intelligence, rules-based systems, scripting engines, and net present value cash flow algorithms to enable Ocwen to apply common elements quickly across a range of modifications, while still allowing for an analytic approach to individual loans, the company explained.

Ocwen has also recently established a Psychology Department, staffed with academics, to help the company’s loan analytics experts integrate behavioral sciences into decisioning models. “The goal here is to remove variability from key processes and make interactions with delinquent customers more effective so we can reach successful resolutions faster,” Erbey said.

So far this year, Ocwen has achieved workouts and modifications that have kept 60,000 troubled mortgages performing — and the borrowers in their homes.

Koches points out that the company strongly backs the broad modification initiatives recently proposed by federal regulators and industry leaders. “Ocwen supports all of the government-initiated loan modification efforts — from the FDIC, the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac. They all represent steps in the right direction to address the foreclosure problem,” Koches said. “At the same time, we also endorse Chairman Bernanke’s entreaty that more is needed. We advocate a quantum leap forward — a larger and more customized loan-by-loan modification program.”