Servicers Focus of Business Model Improvements

As they go forward, insiders say, servicers will focus more on reshaping their business models to better address market demand for risk control solutions and mortgage process transparency.

What is lacking, according to Richard Cimino, CEO of National Asset Direct Inc. subsidiary iServe Servicing, is a better merging of communication between the borrower and the investor, and specialty servicers usually facilitate that communication while direct servicers and third-party servicers are challenged by the overwhelming volume of loan processing. So efforts to improve servicing business models will continue to create new business opportunity for specialty servicing providers in 2010.

Looking for bulk specialty servicing has become a hunt among competitors, Mr. Cimino says, because many of the investors or other entities that own these loan pools are not willing to take their loss right now. "Many feel they can hang on to the properties until the government gets involved, or doesn't. It all depends on where these investors stand, whether they want the government involved or not." How much default risk lies ahead is anybody's guess since expectations vary.

For example, economist David Levi states in his 2010 forecast that the mortgage crisis will become much worse. While findings by the quarterly Default Risk Index published by the University Financial Associates of Ann Arbor, Mich., which is designed to help risk managers understand future default risks, suggest that even in a worst-case scenario the worst vintages are already behind us. In a worst-case scenario the UFA Default Risk Index (it tracks the impact of local and national economic conditions on expected life-of-loan defaults by vintage) peaks at 376 in the first quarter of 2009, while in the baseline scenario it peaks in the fourth quarter of 2008 at 279. In 2009 the index estimated the worst-case scenario risk of default on newly originated nonprime mortgages at 276% higher than the average of the 1990's, while the baseline index peak was at 179% higher than the 1990's average. However, according to Dennis Capozza, professor of finance with the Ross School of Business at the University of Michigan and a founding principal of UFA, "Recent vintages have been much more strictly underwritten by lenders, as a result we can be optimistic that the rate of defaults on the serviced portfolio of outstanding loans can decline as well."

Mr. Cimino also optimistically expects the amount of existing delinquencies to be resolved this year. "Right now the word foreclosure is a very bad word, as it should be probably," he says. Also it is time to look at exit strategies and improved business models, a need bound to create opportunity for specialty servicers who assist with component pieces of the mortgage servicing process.

"There's a lot of companies looking at servicing as a long-term play. They want to be positioned either for their own pools, as a captive servicer, and as a specialty servicer as a business model that is capable to handle the large volume of loans that keeps coming in," he says.

And the most obvious opportunities currently are associated with the Home Affordable Modification Program that requires intensive, face-to-face borrower interaction, which also embodies compliance challenges.

In the end it all boils down to creating a highly efficient servicing or specialty servicing business model.

One opportunity lays in assisting the larger servicers to provide specific pieces of the servicing puzzle through outsourcing HAMP-related paperwork or borrower interaction, he said. "Specialty servicers can bring in expertise at a more focused level and monetize it. That's because many of the specialty servicers have legacy issues with the pooling and service agreement and the fee structure it brought to the pools of loans originated a few years ago. So they cannot operate and then break even in a profitable manner in many cases. And that is a huge problem."

Apparently, part of the success in servicing problematic pools of loans will depend on the willingness of large servicers to alternate between in-house and third-party providers when dealing with some of the more flexible parts of servicing process. The goal is to be compliant and still keep loan modification processing within acceptable cost limits.

According to Mr. Cimino, a successful servicing business model is one that secures operational mobility, cost savings and faster decision making.

Furthermore, the success of a good model and processing systems depend on staff expertise and its ability to take action whether it is to pursue a trial modification or a short sale as a way to avoid foreclosure.

"We're seeing action in the short sale side which will increase thanks to the new government programs that provide additional incentives," agreed Steven Horne, CEO of Wingspan Portfolio Advisors, but there also is "good success" and improved practices when it comes to modifications mostly thanks to technology.

It is evident that servicers need to expand their technology to deal with anything from capacity issues to compliance, says Rick Seehausen president and CEO of LenderLive Network Inc., a provider of mortgage outsourcing solutions to some of the nation's largest financial firms. The more automated the processes are the more scalable they are, he says, and that increases the efficiency of business models large and small.