Mortgage servicing has long been a scale business, but rising compliance costs are now threatening the survival of smaller operations that lack efficient systems or staff expertise, industry experts say.
Servicers now face an avalanche of regulations from the Consumer Financial Protection Bureau, the Dodd-Frank Act, the national mortgage settlement, state laws, and Fannie Mae and Freddie Mac. Those that fail to improve efficiencies and take advantage of emerging growth opportunities may get crushed, according to speakers at this week's Mortgage Bankers Association servicing conference in Orlando.
"Unless you have a considerable amount of scale, frankly, it will be hard to keep up and compete," says Rick Seehausen, CEO of LenderLive, a Glendale, Colo., company that provides technology and outsourced services to lenders. Smaller outfits, he said, are facing a tough choice: stay in the business, exit, or turn to service providers.
Servicers need be prepared to survive through growth, Monica Orluk, senior product manager of Fiserv Lending Solutions, said at the conference. Whether they service loans in-house or use a subservicer, small servicing operations need to have the right staff and operational structures in place.
It is strategically more difficult to be a small shop, said Steve Horne, CEO and president of Wingspan Portfolio Advisors, a specialty servicer in Carrollton, Texas. Added requirements to comply with regulators, the need for more thorough due diligence and higher demand for claims management are creating demand for servicers' work. Meanwhile, demand is now emerging for new services they can provide.
Meanwhile, Orluk said, "there are new players coming to the market as some of the smaller servicers are trying to take advantage of the fact that the larger ones are unloading" mortgage servicing rights. That is a great investment for the new players if they can raise the capital. "But if they do not evaluate their operations and staff, they will not be able to succeed."
For example, she said, small servicers that take on portfolios of loans guaranteed by Fannie Mae or Freddie Mac need employees who understand the government-sponsored enterprises. "If you're going to do mortgage servicing, you better understand the regulations, staff has to be experienced enough and everything needs to tie up together to reduce the compliance risk."
Challenges include funding servicing advances, meeting net-worth requirements, monitoring subservicers and understanding Consumer Finance Protection Bureau exemptions for smaller servicers, said Orluk.
The fact that mortgage servicers are complex, systems-driven organizations is only now dawning on people—even some mortgage industry insiders, Orluk said.
Joseph A. Smith Jr., the monitor of the national mortgage settlement, acknowledged as much in his address to servicers attending the MBA conference. Servicers, he said, have to manage a series of complex variables that include various loan products, differing requirements from regulators and capital market investors and, of course, the settlement.
"All of these variables have to be programmed into the servicers' systems. Each system change is expensive and complicated and brings the possibility of errors, leading to costs to fix up and potential legal and regulatory liability," Smith said. The jury is still out on how well servicers "handle loans where something goes wrong."
Performance pressures hanging over the industry make it imperative to constantly evaluate compliance with the CFPB, the Office of the Comptroller of the Currency, Fannie Mae, Freddie Mac and other regulators; and evaluate their entire operations "to make sure the business systems that are in place can support up and coming changes," Orluk said.
"Everything has to come together: the systems that help reduce compliance risk and the ability to change, adopt and react fast to new business demands," she said, as bigger challenges for smaller servicers come alongside growth opportunities. "Growth is good if your foundation is solid," so even well-capitalized servicers must never lose focus on operations.
Smaller servicers especially need to reevaluate their options, if they have not done so already, said Ed Fay, CEO and founder of Fay Servicing LLC, a Chicago outfit that has been steadily growing during the past few years.
Operating systems affect servicers' performance, Fay said, because most are incompatible with one another.
"Every company still uses different systems that cannot work with other systems" and a nationally coordinated system seems too complicated to accomplish. Mortgage servicing is complex, but "at the end of the day a servicer's job is very straightforward, and not that difficult," Fay said; compliance related changes are harder to implement.
"The industry was sidetracked for so long that we have not yet reached to a normalization of regulations and will have to endure," Fay said. "Twenty years ago servicers were sitting at the back of the room, now they're sitting in the front," and the prominence comes with a price.
Regulatory requirements have once again brought the spotlight on execution, said Andy Laing, chief operating officer of Fay Servicing. In today's environment small servicers who manage better execution will prevail. "Servicers should never forget that change is an opportunity, we need to make the best out of it."
To Laing, effective execution means doing a good job managing the cost structure of operations, including staff. "The consumer comes first, but you need the right people to do the job right."