Attorneys Eye the Dodd-Frank Act

Along with the foreclosure gate the Dodd-Frank Act also is in everybody's mind, according to mortgage veterans Steve Horne and Greg Hebner who expect it to be a hot topic at the upcoming industry conventions. And for a very good reason.

If as of now these attorneys say it is a testament to “good intention” governance, the new legislation’s success or failure will largely depend not only on how it will be implemented but also on how its specific requirements will be defined.

“There’s not much meat” in those pages of the Frank-Dodd Act, says Hebner, president and CEO of Irvine, Calif.-based MOS Group.

He finds it worrisome that the new bill “has a lot of ambiguity.” Those hundreds of pages lack an implementation timeline and specifics. Requirements, especially mortgage servicing or special servicing related requirements along with most topics, including how to deal with borrower information, are not clear.

“It is all about transparency for customers,” he said. “On the servicing side, it is really about disclosure and transparency.”

For example, it is not clear how big potential liabilities can be if a lender does not approve a borrower’s application. The bottom line is that there will be additional servicing costs that unavoidably will translate into uncertainty about loan risk valuation.

Horne told this publication the Dodd-Frank Act “clearly seems to embrace the idea of relying on special servicers going forward,” and at least that part seems to be going into the right direction.

Is that a special servicer’s self-serving bias? Horne says “that bias” is the reason why he created Wingspan as the crisis unfolded, it is based on the belief special servicing “is the right answer” for what needs to be done from this point forward.

Special servicing could be loosely defined as servicing distressed assets, but the industry still is in search of what the special servicing standard model should be.

Horne says Wingspan works with firms that have purchased nonperforming loans, or working with institutions that need to service their nonperforming loans, which also means that these entities may be getting back-office support not only from Wingspan, which may be catering to only a portion of their servicing needs that have exceeded their in-house capacity.

A preventive approach to foreclosures has proven to be the best solution. Going forward, Horne says, special servicing will be quite simple. Instead of opting for a foreclosure referral once a loan is over 90 days delinquent, servicers may do a default referral, “so that at that point in time it becomes the responsibility of the special servicer.”

This way special servicers retain the required legal services to either liquidate the collateral or motivate borrower collaboration, while following attorneys’ recommendations to achieve the maximum resolution value for that loan from both an economic and a public policy perspective, he said. The special servicer will be compensated based on the success of measures taken to maximize the value of a loan, which is how Winspan operates its services.

In Horne’s view special servicing should be more preventive than reactive since at the end of the day for special servicing to work compensation must be based on success.

The reason special servicers need to remain a separate entity from the primary servicer, he said, is “to preserve the alignment of interest, since the primary servicer needs to focus exclusively on keeping performing loans performing.

“You can’t turn default servicing for a primary servicer into a profit center from that primary servicer, otherwise you create a very strong conflict of interest where they have an incentive to allow loans to go into default.”

On the other hand, from the investor’s perspective, paying more for special servicing is in their economic interest because good special servicing will put money back into their pockets to reduce credit losses.
In Horne’s view, “market forces are pushing that way.”

Hebner agrees servicing and special servicing will have a significant role to play in the mortgage market going forward. His hope is that the new act will be a collaborative process that will help improve the bill the same way government-private sector exchanges helped improve HAMP.

He sees as “good news” the fact that mortgage servicers have already made significant strides to improve their industry and its processes. It also means servicing and special servicing may fall lower on the implementation priority agenda.

All those being equal, he says, there is opportunity for special servicers, outsourcers and vendors.