Small Shop Present and Future Survival Challenges

At least one bank surviving the crisis as a small fish in the pond is getting ready for an even more competitive marketplace going forward.

Smaller banks and mortgage servicing shops will be hit even harder as the market starts to recover, says Daniel Gotlieb of Desert Schools Credit Union, Phoenix.

"There are a lot of challenges for small banks like credit unions and it will be harder as the larger banks start to heal and handle all the business." He argues that loss mitigation is harder from a small servicer's perspective. Banks need to tie all loss mitigation processes together to be able to efficiently outsource, which is very new for most credit unions since they are very different from other banks, he says. For example, over the years DSCU never saw any losses until 2008.

"Our servicing platform has about six pieces to it, so to tie it all together and be effective in loss mitigation is a tremendous challenge. We are worried of putting it out there and then having it completely fail. ... On top of that is the credit union relationship, the fact that we're member owned ... that when we share our member information they do not get upset."

Lots of pieces, or must-have tools need to come together to make loss mitigation successful, says Mr. Gotlieb, who has 15 years of loss mitigation experience including starting the first loss mitigation department for DSCU. "But the most important is expertise, having trained folks."

Markets differ. In the Phoenix area there are not many loss mitigation experts to hire because traditionally there have not been many servicers in the area.

"We have had to grass-root train people, choosing the right folks for the job, moving staff around the company rather than laying them off. It means training them to make sure people have the tools they need," Mr. Gotlieb says. "Loss mitigation is negotiation, a skill. It's an art. You need the right people with the right personalities to make it successful. To blow that out and then go to the next level and outsource is a lot of work."

Banks restructuring a loss mitigation department often have too few experts and too many vendor options.

"The servicing business is changed. What special mortgage servicing technology providers are doing is revolutionizing the market by enabling users to choose between a compartmentalized approach and basic outsourcing, or cradle-to-grave approach. It appears demand is higher for the latter, with some aspects of a compartmentalized use of outsourcing," says Alex Santos, managing director and COO of Digital Risk, Maitland, Fla. "There's a plethora of tools but there's no substitute for experience."

There is such demand for experienced loss mitigation people that servicers need to train less experienced staff, upgrade processes and use successful outsourcing to increase loan processing efficiency.

Improving old technology is not always successful, Mr. Santos says. For instance, while it is preferable to have the same customer contact the person during the whole loan modification process, technology is changing so fast that it is a good idea to use it as an outsourcing option. "You need to look at your book of business and do an internal study first to see where your strengths and weaknesses are, to be able to decide."

"First, outsource the things you don't do well," advises Steven Paton, SVP of loan administration at Marix Servicing LLC, a loan servicing company specializing in loss mitigation technology founded in 2007. "Rather than re-engineer your shop it's usually convenient and economical to have a vendor do the outsourcing - if it can be a smooth adoption and insertion into your processes. Third, always try to have an exit strategy in case the outsourcing doesn't work or doesn't give you the benefit it promised."

Loss mitigation is challenging because it is high touch, Mr. Gotlieb says. "One change we started to make during this crisis is to convert our technology platform, which was initially created in 1993 and consisted of a patchwork.

"Credit unions, regional banks, even some of the larger banks had platforms that don't talk to each other, therefore you don't have live information," Mr. Gotlieb says. Plus, smaller banks that do not receive TARP funds often need investor support to make those changes.

"It has been very difficult. Our credit union went from very high credit loans and good profitability, even though we're not for profit, to dealing with defaults. But being smaller we're faster in implementing changes and more hands on."

Also, because DSCU operates in Arizona, which was hit by the crisis really hard and early on, DSCU started to adjust and improve itself each and every time a new wave of foreclosures hit the marketplace, he says.

"We're adjusting all the time. That's a good thing about being smaller, not so good when it comes to technology."

While historically national credit unions had very strong portfolios, he recalls, in 1998 they "changed dramatically becoming more like regional banks than the institutions associated with the place one lives, works and worships because now members may come from different states."

These changes in the profile of members, the fact that the relationship may only consist of a mortgage loan being serviced by DSCU and does not include other assets and deposits, he explains, is a challenge to credit unions and other regional banks because the credit risk changed.

"We are sort of going through the school of door knocks. The downturn may have hit hard but credit unions and smaller banks have learned a lot from it - it will make them stronger."