Are Subprime Default Management Models the Best?

At least one mortgage-servicing consultant believes that default management business models used by the subprime industry before the crisis can be successfully applied today by servicers in procedures that include anything from appraisals to loan workout models.

"The default management expertise of subprime firms can be the best workout solution used in a prime shop today," Houman Talebzadeh of Earnst & Young, a consulting firm specialized in the assessment, design and restructuring of servicing firms told e-msn.

The industry is now dealing with what he calls "the Obama factor of change." So servicers need review what is really changing and what are the practical effects of these changes, or how they translate into workouts and efficient operational systems. "As consultants we review solutions across industries," and then figure out what are "the workouts that work." According to Mr. Talebzadeh, who talked to e-msn at the MBA's National Mortgage Servicing Conference & Expo 2009 in Tampa, the subprime market loss mitigation expertise is one such option.

Linda Simmons, general manager of mortgage finance solutions at Overture Technologies, Bethesda, MD, told e-msn she believes the role of servicing "probably is going to be redefined!" and automated underwriting is "the next frontier."

Today the industry is reliving many of the 2001-2007 decisions in loan servicing, generally, and in the default management arena in particular.

"It's only logical - so why not move automated underwriting tools into servicing, where they can help determine best options for loss mitigation?" Efficient systems have helped servicing become a true economy of scale.

Special servicing demand is here to stay for at least another 5 years, she said. Meanwhile, everyone is aware of the gloomy statistic that up to 50% of borrowers in default never contacted their servicer.

However, in a by-lined article late last year she cautioned that, "While servicing software may drive the process, in many cases humans are making the decisions. We don't want to replicate the nonconforming underwriting process in loan servicing."

As servicing industry changes, Ms. Simmons told e-msn, one of the outcomes will be that servicers turn into customer advocates.

Reasons behind that trend, she explained, include the fact that servicers recognize the benefits of better servicer-borrower communication as a default and foreclosure prevention tool if the process starts the first day they default rather than after 30 days or more. As time progresses default management also becomes more costly. Call center contacts and phone calls remain one of the most expensive ways to manage workouts, she said.