Special Servicers, Realtors Prepare For Demand Growth

Industry data showing delinquencies will continue to plague the mortgage market in the near future also indicate demand for short sales will go up motivating special servicing providers to get on gear.
Most agree that specialized expertise—combined with effective borrower outreach and technology—are key in the success of a short sale transaction.

Lender servicers need to reach for more people than they are today and communicate a number of value propositions to be able to engage borrowers, said Bank of America senior vice president, David Sunlin, during a panel discussion at the MBA National Mortgage Servicing Conference in Dallas. It is indicative that up to 90% of all the B of A properties that are now bank owned were not listed for sale, he added. “It’s a sales gig.” The power of denial is very strong for someone who is losing their home, he said, and that makes a servicer’s job even more difficult.

Another challenge, according to Travis Olsen, CEO of Loan Resolution Corp., is to know the answer to a frequently asked question: “Where is the short sale market?”

While it has potential anywhere in the country, data support some insider’s claims that demand for short sales is higher especially in some of the major metropolitan areas, he said. For example, CoreLogic data from October 2010 indicate that one of the hottest short sale markets in the country is Detroit where 68% of all sales were short sales, compared to 3% in REO sales, out of a 71% total of distressed sales in the area.

And declines in property values are one incentive associated with the belief that nonetheless many markets have not yet reached bottom. Currently 23% of all U.S. properties are under water, at a staggering total of about 11 million properties.

Another example is Phoenix where 27% of all mortgages are under water and foreclosure filings increased 16% in January.

“Times have never been busier,” more people are asking about short sales and trying to avoid misinformation, says Jill Segrove, a Realtor with Phoenix-based Prudential Arizona Properties. In addition to negative equity pressures and foreclosure risk, many borrowers with the 2006 five-year adjustable-rate mortgages are now due to hit the market, she says.

“Keeping abreast with the market and knowing a lender’s protocol is key to a successful short sale,” Segrove said, so nothing matters more than experience in default management.

She works will sellers to help them understand their options including the fact that “a short sale is not always the best option.” For example, a popular misconception is that the long-term effect of a short sale is the same as that of a foreclosure, which is “absolutely not true,” she said. “So understanding a homeowner’s position helps me explain other options available” and if someone really wants to stay in their home “pull out all the stops” to make that possible. Yet a short sale may be the only option for sellers who do not want the long-term ramifications of a foreclosure.

Her common-sense approach to understanding and responding fast to a customer’s situation is also how many special servicers approach distressed borrowers on behalf of servicers.

Responding to "rapidly growing" demand for foreclosure alternatives, Wingspan Portfolio Advisors founder and president Steven Horne says, he has been adding new staff to his Carrollton, Texas-based special servicing firm. Its 300 employees are specialized in bringing back to performing status severely delinquent loans, managing foreclosure alternatives to reduce loss severity and providing accelerated short sales.

In 2008, Horne, an attorney and former director of risk servicing at Fannie Mae, introduced a new approach that has allowed Wingspan to “do things that the current servicing model doesn’t allow primary servicers to do” and only get paid when either a modification, a short sale, or another alternative is successful.

The firm’s 80% success rate in avoiding foreclosures, he said, was made possible by spending “a tremendous amount of time with borrowers in an effort to understand their situations and their commitment to remain in the home—time primary servicers simply can’t afford to invest “under the compensation model that has been in place for decades.”

Wingspan is not alone, the whole special servicing sector is growing. He agrees with FDIC chair Sheila Bair, who recently noted that due to the “fatal flaw” of the traditional servicing compensation model loss mitigation efforts so far have not been very successful.

“There is an inherent conflict,” Horne says.Servicers need to be paid more to perform the time-consuming default management tasks. Yet paying them more to do so “would effectively provide an incentive for them to have loans in their care go into default.” Which is why many servicers are now opting to transfer servicing of delinquent loans to independent third-party specialists. “No wonder, then, that we have experienced such dramatic growth in our sector.”

As to how can a specialty servicer be effective, his answer is: investing in default management technology that allows for fast execution of foreclosure alternatives.

“Combining highly specialized skill sets with highly specialized technology has been the key to our success,” he says.

Tapping the rapidly growing potential for short sales as a foreclosure alternative, the company employs a technology from IndiSoft that assists Wingspan to accelerate the short sale cycle from 12-16 weeks down to six or fewer weeks.

Plus its professional services division handles customer complaints history and reviews third-party servicer performance, loan files and claims.

“Technology has made a tremendous difference, but there is no substitute for people who can build trust and rapport with desperate borrowers,” Horne says, who expects his firm to double to 600 employees in the near future.