Costs, Complexities Of Servicing Shape Subservicers’ Roles

Defaults, foreclosures and depreciation combined with unprecedented regulatory compliance demands have already transformed loan servicing into a highly complex and pricey process that inevitably will become even more expensive.

Nobody can predict how long it will take to process, modify, review or foreclose the millions of distressed assets currently in the servicers pipelines or clogging courthouses. Estimations vary from two years to five and even 10 years. It is getting clearer, however, how overall mortgage market changes have changed subservicing.

Four distinctive trends in the subservicing and specialty servicing marketplace have turned the marketplace into “quite a different market in the last couple of years than it has been in the 30 years that I’ve been part of it,” says Marc Helm, COO of Reverse Mortgage Solutions Inc. and president of RMS Consulting.

What is newest in subservicing today is that it has expanded into specialty servicing to provide loss mitigation for opportunistic buyers of damaged loans, says Helm. Market demand is giving birth to specialty subservicing.

Subservicing, which traditionally served smaller-size banks and credit unions that did not have enough loans to justify the existence of an in-house servicing shop, has been greatly affected by the high-risk subprime products that came out in the past five years. All the bad paper owned by banks, foreclosures, efforts to save as many borrowers as possible, problems with HAMP and other measures some of which have not worked are creating a new environment. Loan-level transparency and intervention has become more challenging for large lenders, servicers and investors, so as everyone is looking at “bits and pieces of how to maximize value” in areas such as REO management for example, they need to use specialty subservicers.

“What’s changed in subservicing is the landscape. When you say subservicing now, it doesn’t mean subservicing as much as it means specialty servicing,” he says, it is becoming the new normal. “So the term should be specialty subservicing.”

The market has shrunk leaving only a few subservicers still standing. And “if you look deep enough,” he adds, most of them have turned in to specialty servicers.

Business development director, SVP of Cenlar FSB, David J. Miller Jr., does not agree. He said at least Cenlar, the country’s largest subservicer, is sticking to traditional subservicing that does not involve default servicing and continues to provide services to large and small banks, credit unions and the GSEs.

Miller told this publication he sees growth in the market primarily in specialty servicing not in the traditional subservicing shops.

Helm, on the other hand, sees Cenlar’s servicing contracts with Fannie Mae and Freddie Mae as a hybrid of subservicing and specialty-servicing job, given that many GSE loans are in default and need special servicing. Once Cenlar signed with the GSEs, he says, it did not only become the largest subservicer in the country but also “just about” the largest specialty subservicer. It is the biggest not so obvious change within the industry. Since the name of the company remains the same, Helm says, people may think business is the same, but it is not any more.

Despite massive loan modifications the amount of “bad paper” still in the pipeline is significant enough to keep demand for specialty subservicers strong for the coming two to three years, Helm says, “then it will go down.” Which is why his subservicing company is one of many smaller shops with a new focus. “The way we’ve reached out is through a number of SQ or specialty servicing solutions, whether it’s scratch and dent, REO liquidation, consumer loans, or whatever the case might be.”

In his view the second major change is that while the distinction between subservicing and specialty servicing is getting blurred, the need to separate the servicer brand from that of the subservicer is still there.

Smaller shops that subservice their loans need to be able to continue to service their loans in a private-label basis that separates their brand name. “Along with this migration of a lot more loans into the specialty servicing arena there’s been a need for branding, high-level customer assistance, and a real true line of differentiation between a servicer and a subservicer.”

The difference between the two is in the approach. If servicers are engaged in a routine customer service process, subservicers and specialty servicers bring into the process a higher level of accuracy and customer trust. Not only the name but the quality of what subservicers are doing is changing. There is more focus on the private-label branding.

Another change is a significant growth in the past few years. New pricing allows new shops that are subservicing 3,000 to 4,000 or even 12,000 loans, compared to thousands of loans serviced by the megabanks, to be compete in the marketplace.

It is a “different kind of pricing.” In a regular portfolio the subservicing loan cost would be $6 to $8 a month. In the special subservicing world there is a wide variation of pricing depending on the status of the loan: defaulted, REO that needs to be liquidated, or other distressed asset. The servicer helps investors maximize portfolio values through anything from loan restructuring so they can be sold in the traditional secondary market to liquidating REOs.

Demand for strategic loan servicing is bringing to the marketplace local service suppliers.“I can name from the top of my head 12 subservicers that just popped up in the state of Texas in the last two years that today are servicing between 2,000 and 7,000 specialty loans,” says Helm. “We never had that many small subservicers before.”

The fourth trend relates to higher servicing cost efficiency. Even small subservicers are outsourcing functionality through third parties. If traditionally subservicers outsourced tax and insurance services, he says, now they may transfer foreclosure work, hazard insurance claims, filing data into the MERS system so that moving collateral around is as easy as recording assignments.