"Subservicing for new private money loans and specialty servicing for loss mitigation work on nonperforming loans are growing rapidly. 2014 is looking like a record year for us in both areas," he says.
Subservicing at Albrecht's Anaheim, Calif.-based FCI Lender Services was up by more than 50% in the fourth quarter of 2013, spurred in part by the Jan. 10 Dodd-Frank Act deadline for lengthy new mortgage regulatory measures.
"It's a one-time surge, but it is not going to come back down. It has been continuing with no let-up at all. You know how people wait until the last minute. There will be another big surge in the first quarter, and then it will be back to being constant. Once you shut down [certain servicing operations and outsource], you don't go back in," says the executive who runs the nation's largest private-money servicer and helped found the American Association of Private Lenders.
Operational cost constraints in addition to the compliance burdens associated with several hundred pages of servicing-related Consumer Financial Protection Bureau regulations have contributed to the move toward subservicing, says FCI's senior director of marketing and strategies.
"Small servicers won't touch new regulation. They are scared of the liability. They spread the servicing fee and subservice to us. We're the ones collecting payments. We're the servicer in the docs," he says.
FCI is able to address such challenges through a mixture of economies of scale, regulatory expertise and automation, says Albrecht.
"We have got full time compliance people here who are on top of that as well as all the regulations that have been in place for years. You also have got to have technology handle it. There is no other way," he says.
Morningstar Credit Ratings LLC recently raised FCI's special servicer rating to MOR RS2 from MOR RS3 citing among other things its compliance and technology resources.
FCI had to build proprietary automation to handle the nuances of today's servicing requirements. "It took a year-and-a-half to write," Albrecht says.
The technology helps FCI manage tasks like required routing for borrower notification that needs to account for loan-type distinctions. Primary residence loans need different treatment than others, for example. It also needs to account for the time of day in terms of when notification letters go out.
Loan types in the private money market FCI specializes in vary widely and encompass both residential and commercial lending.
Commercial/multifamily servicers as well as single-family residential ones are facing higher costs and regulatory pressures that are driving demand for subservicing, says Jan Sternin, senior vice president and managing director, Berkadia. Subservicing in this market has "taken on a much larger role" and "there are more folks sharing the servicing responsibility as opposed to the number of servicers shrinking" as a result, Sternin says.
Private money lending encompasses a wide range of property types but has its limits. Lenders in this market require low loan-to-value ratios to ensure there is equity. This helps ensure borrowers make their payments. A borrower can lack a credit score, but LTVs generally must be 65% or better. "The standard, if you will, is 40%-65%. It almost never goes above that," he says.
FCI is a rated servicer with the experience and credentials needed to handle the full range of loans and workout options in the market. These include Fannie Mae, Freddie Mac and Federal Housing Administration, Hardest Hit Funds and the Home Affordable Modification Program.
The private money market has gone through significant changes since the recent downturn in the now-stabilized real estate market, Albrecht says.
Private money lenders lack the compliance experience regulated institutions have and have had to make more of an adjustment to the latest regulatory burdens.
They have more experience and comfort than banks do with nontraditional loan product types, though.
When banks and more traditional lenders dove heavily into nonconforming lending during the boom period they apparently lacked the experience to know how important limits like LTV ratio maximums were.
"We watched that for years, wondering if it was going to explode," he says.
Private money was once largely a higher rate, "hard money" lending business consisting of shorter-term loans for challenging situations. Then "soft money started sneaking in" as banks and institutional lenders tightening their lending standards severely and private money started to meet an increased need for longer-term, lower-rate lending, says Albrecht. There is about a 50-50 split between hard and soft money lending today. Private lending's soft-money rates are higher than the mainstream market's lending rates but they can be as low as 6% to 8%, he says.
"I don't think the institutional world is ever going to pull these guys back," he says. "Subservicing for private-money originators is just exploding because if you are not gold-plated today, you don't get a [bank] loan. These loans can fund in five days, and there isn't a bank out there that funds in five days."