FEB 25, 2013

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What We're Hearing

High-Touch Servicing After Buying Low-End

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WE’RE HEARING…in the last few years, private equity, hedge funds and Wall Street types have eyed the distressed housing market for buying opportunities. Community banks and credit unions have taken notice of the opportunity as well. The appetite for bottom fishing has only increased as economic signs point to improvement in the housing market.

But for buyers of distressed loan portfolios, the opportunity to buy low now with an eye toward selling high later comes with a challenge: how to service the asset portfolios they acquire, which often consist of loans that are in default or seriously delinquent.

LenderLive Network views this challenge as an opportunity for them to pioneer a new flavor of “high touch” servicing. Chris Sabbe, a senior vice president at LenderLive Network, said the company is offering something of a blend between special servicing and traditional subservicing. When portfolios change hands, that creates an opportunity for a change in mortgage servicing, he says.

LenderLive has been building its servicing capabilities for the last three years, but he says the focus has shifted to “getting more customers in the door” recently. Earlier this month, the company added Spartan Equities, an investor in distressed housing assets in Michigan, to its roster of clients.

“In the last three months, it is almost like the market has woken up,” Sabbe told me last week after returning from the MBA’s National Mortgage Servicing Conference.

LenderLive is not looking to take on the behemoths of the subservicing business, who can take on portfolios of 100,000 or more loans at a time. Nor do the company’s executives intend to take on special servicers that deal exclusively in defaulted or seriously delinquent loans. Instead, the company is focused on portfolios more in the 1,000 to 20,000 range, portfolios that often include a blend of performing and nonperforming assets. Sabbe says that ability to offer “high touch” servicing at a price point lower than special servicing is what sets LenderLive apart.

The new investors focusing on buying portfolios with a high level of distressed at a discount are often in a good position to help borrowers with modifications and workouts, Sabbe says.

“They are very similar to the community banks and credit unions, because they are very much in touch with the members. They just want to keep people in their homes.”

LenderLive has partnered with FICS for the technology behind its servicing platform, because the flexibility and ability to customize the FICS platform supports LenderLive’s business strategy. LenderLive surrounds the FICS platform with proprietary software to facilitate loss mitigation and loan workouts.

The bigger servicing platforms are designed for large volumes and a “one size fits all” approach to servicing, Sabbe says.

“Well, my customers are not one size fits all.”

In developing the workflow waterfalls and delegated authorities for loan modifications and workouts, LenderLive meets with customers to understand their processes before installing the technology. Sometimes the company builds proprietary software to meet a particular client’s needs, and sometimes technology that is developed for an individual client may prove useful for other servicers as well.

One area that LenderLive is focused on is the “hardest hit” funds administered by 18 states that were disproportionately affected by the housing crisis. Those funds, over a billion dollars in some states, are available to provide payment relief for loan workouts for qualified borrowers. The “hardest hit” program was created as part of the TARP effort to stabilize the financial markets.

Despite the large size of the “hardest hit” programs, Sabbe said many borrowers and even servicers are not fully aware of them. And he admits that because adding a third party—state governments—to workout negotiations can make the process cumbersome. Those “hardest hit” programs are a little underutilized, Sabbe said.

“A lot of borrower education is still lacking in the market today. The borrowers don’t know they have options to stay in their homes,” he said.

As a result, servicers working with a large volume of delinquent or defaulted loans need to use both technology and old-fashioned “hands on” customer care to minimize loss exposure on troubled loans.

“Borrower contact is still king. If you can’t get them on the phone they are probably going to go into foreclosure,” Sabbe said.

The challenge in marketing this hybrid servicing model, Sabbe said, is that most servicers feel very reliant upon their “incumbent” loan servicing technology provider. They believe that changing platforms is a burdensome undertaking, whereas in most cases it just relatively simple data mapping is all that’s needed to switch a portfolio to a new servicing platform.

Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.

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