It was not long ago that the Federal Reserve managed its response to unemployment and inflation in isolation, treating each issue as its own distinct and unrelated entity. More recently, there has been an apparent philosophical and cultural shift at the Fed, exemplified by the December 2012 announcement of a specific unemployment target and the corresponding intention to keep interest rates low until that target is met.
This holistic approach, where issues are explicitly evaluated and addressed, not in a vacuum, but as part of a related system of interconnected factors, is similar to what needs to happen in the default servicing industry. In an industry looking to move forward in the wake of significant challenges, and under the pressures of a radically altered regulatory and procedural environment, this is precisely the kind of evolution that needs to take place.
When problems arose in the past, the industry traditionally managed issues and addressed symptoms in isolation from each other, adopting a reactive posture to new regulations and legislation. As delinquencies increased, and consumer protection efforts expanded exponentially, that dynamic began to take its toll.
With the industry reacting to issues in isolation, it was clear that servicers were overregulated, overstaffed and overspent. Too many servicers were (unfortunately, but understandably) simply doing what had to be done, knowing that it may not have been the most efficient or effective strategy. Not only has that fire drill response been inefficient, it has also been a waste of resources and made it difficult to assess structural problems.
A great example is the Independent Foreclosure Review program that was extended three times and then killed in January, the month it was to end. The program cost $5,000 for each loan review and paid out a fraction of that amount to the underwhelming number of “wronged” borrowers.
It is becoming increasingly evident that mortgage servicing organizations—from servicers to default servicing law firms and their vendors—will not be viable if they don't evolve. While the number of delinquencies has decreased, the number of foreclosure files that are delayed is still significant. The challenge (and the opportunity) is for servicing professionals to find new ways to adapt to that new normal.
From ensuring that regulatory and procedural standards are met, to thoroughly vetting law firm partners and their vendors, to delivering more efficient processing services, mortgage servicing organizations have an ambitious agenda going forward. Much of that agenda can and will be achieved through the adoption of analytical portfolio management, investing in new technologies, automating processes and the like. Mortgage servicing professionals looking to get both better and faster can integrate those efficiencies by adopting the following best practices.
Embrace new efficiencies
First, manage to the overall band of performance, not to the extremes and outliers—managing the overall portfolio as opposed to each individual loan. Additionally, when developing your technical and operational infrastructure, remember that, while it needs to be able to handle extremes, it also needs to be scalable: volume has and will decrease.
The adoption of industry-wide standard auditing practices and uniform audit standards will help boost efficiency from the servicer side and enable vendors and legal partners to operate more effectively. It is also important to be strategic with respect to compliance with new regulatory standards. While a single point of contact is obviously an important high-touch reform, there are still opportunities to develop new staffing efficiencies through additional training and the introduction of cross-departmental competencies.
Analytical portfolio management
Leverage analytics, assessing groups of loans instead of individual files. Part of this new, more sophisticated analytical approach requires a deeper dive into the data. This more holistic strategy can identify files on track for successful loss mitigation and move those files back into the performing portfolio. It can also provide nuanced and comprehensive inventory performance reports, showing what portions of a portfolio are performing as expected, and where the outliers are.
A sub-servicing executive once told me that sub-servicing is necessary and successful because they look to find solutions for the large majority of delinquent borrowers instead of finding the one who is scamming the investor. This shift in mindset needs to take hold, in earnest, throughout the industry for it to move forward efficiently.
Make use of new tools
Short sales, principle write-downs and other loss mitigation alternatives have become much more commonplace. Portfolio management and tracking software cannot only reduce costs through automation, but can unlock exciting new insights to assist in decision making and lead to powerful new efficiencies.
Adapt to new realities
One of the ways to add more consistency and efficiency is to establish long-term working relationships with vendors, and to implement a strategy for clarifying expectations, managing performance and auditing them appropriately.
Another much-needed change is the adoption of a results-based fee structure for servicers. In an industry where so much has changed with regard to how files are managed and how procedures are regulated, a simple volume-based fee structure is antiquated and does not address the realities of the industry.
For some time now, the industry has accepted chaos as the new norm. Now that the dust has settled, it is time to normalize and create a collective consensus around this new model. If servicers and their professional partners do so individually and collectively, the default servicing industry may enjoy a positive, productive and increasingly efficient future.
Scott Goldstein is President and CEO of Farmington Hills, Mich.-based NDeX, a provider of technology and processing services for law firms nationwide. Goldstein currently serves on the Federal Reserve Bank of Chicago Advisory Council. He can be reached at email@example.com.