To help mitigate defaults and foreclosures, residential mortgage servicers in the sub-prime arena are stepping up their borrower contact campaigns, adjusting payment plans, and setting up local task forces in hardest-hit areas, according to Standard & Poor’s Ratings Services.

The ratings agency details these and other findings in a new report that explores ways that loan administrators are coping with increased servicing challenges in the residential sub-prime market. S&P published the report, “Subprime Loan Servicers Step Up Loss Mitigation Efforts To Avoid Foreclosures,” on its RatingsDirect.com Web site on March 14.

According to the report, first-payment and other early payment defaults are among the challenges that loan administrators face as property appreciation slows and borrowers with lower credit quality find themselves unable to handle increased mortgage payments after their adjustable rates reset.

“The nature of the affordability mortgage products in the market that have grown so popular in the past few years further complicates matters for servicers,” explains analyst Robert Mackey, an associate director in Standard & Poor’s U.S. Servicer Evaluations group. “Because of their inherent complexities, these loans can’t be administered as simply as traditional 30-year mortgages. Additionally, the credit profiles of sub-prime borrowers are much different than those of borrowers in the prime sector.”

Because his group evaluates servicers in terms of their ability to handle operational risk, Mackey reached out to select subprime and special servicers that his group follows to see how they are handling these mounting issues.

“When we talked with various participants, we focused on the techniques they're using to deal with the spike in delinquencies and other troubling market trends, especially first-payment and other early payment defaults on loans originated in 2006,” Mackey says. “We also talked about how they’re preparing for the adjustable-rate mortgages that will see rate and payment changes in the months ahead.”

According to Mike Gutierrez, who heads up Standard & Poor’s U.S. Servicer Evaluations group, the responses were encouraging, and he indicated that most loan administrators are acting assertively and with the ultimate goal of preserving homeownership whenever possible.

“Based on our discussions with servicing professionals, we have gained insight into the tactics they're employing in these troublesome times, and we are confident that servicers are taking proactive measures to battle the current wave of early payment defaults,” Gutierrez says.