Size, Survival and Market Share

Data, information accuracy and technology flexible enough to allow fast processing is what many servicers are focusing on to ensure they are efficient in the marketplace in the coming year.

"Imagine starting a foreclosure on someone who already is in the process of a loan mod or short sale because the information is not in the system," says Greg Hebner, president of MOS Group Inc.

The marketplace needs compatible programs that allow information to be conveyed through seamlessly integrated processes.

"It probably is the biggest problem for many of the smallest companies, and probably every week I hear about somebody who's new to the space, but they just are not integrated, they're not tied to the legacy systems," he said. "All servicers basically use three systems, so if you're not tied to that, you might as well be in Siberia, you're out on your own island." This new reality, however, is not expected to build up pressure on small- to average-size servicers to the extent they would rather get out of the business. Many well-structured, cost-efficient shops that have found their niche markets are doing well and are well positioned for the future.

The biggest effect of HAMP, Mr. Hebner says, is that it has changed the dynamics and the economics of the mortgage servicing business.

"Before, any time you dealt with a loan modification or loss mitigation, it was probably a loser."

Traditionally a servicer is paid basis points on the portfolios they service, so unless these payments come in, there is no revenue. Now the government is offering up to $4,500 not only for delinquent loans but for a preemptive loss mitigation effort as well. "All of a sudden the economics for the servicers of nonperforming loans are extremely attractive. They will make more money modifying a nonperforming loan than they would make by servicing a performing loan."

The ultimate effect of these incentives will be determined by whether the government and lenders will require servicers to implement very high standards of performance and reporting transparency.

Will servicers who are successful in meeting these standards gain market share? And will the ones who don't be marginalized?

"These days all the new originations are conforming FHA, Fannie and Freddie loans, and these portfolios will be placed with the servicers who have been doing a good job with the troubled loans of the past," he argued, making the present a very interesting time for servicers.

Market share leaders are going to be the firms that deal with these issues. "They will earn huge profits because it's a scale business. If you're a small servicer, if you're not specialized, you're going to get crushed."

It leaves the marketplace open to the top 20 servicers to compete for the new business.

"It's a very interesting time for mortgage servicers. It used to be a sleepy business that all of a sudden has turned into a dog fight," he said. "Market share is dictated primarily by how well they manage HAMP and other government programs."