Real and perceived mortgage servicer failure to assist borrowers, provide foreclosure prevention solutions and in the case of the larger mortgage servicers, failure to manage capacity challenges that crippled their ability to conduct workouts efficiently have already changed the marketplace.
For example, loss mitigation practices have become highly automated and thus more efficient, the high touch, face-to-face borrower communication and the single point of contact approach being required when managing loan delinquencies also have changed the servicing process.
Servicers’ strategies also have changed as they decide whether it is worth it to stay in the servicing space, outsource or exit it. Now more than ever the size of operations matters and often is a determining factor to the success of the business.
At the MBA’s National Mortgage Servicing Conference in Dallas, Mark Fogarty, editorial director of the mortgage group publications, Amilda Dymi, managing editor, Mortgage Servicing News, and Evan Nemeroff, Managing REO reporter, Mortgage Servicing News, sat down with mortgage industry insiders Ed Fay, CEO of Fay Servicing, John Vella, COO of Equator, and Loren Morris, general counsel and chief compliance officer of Retreat Capital Management, to hear about their reaction to these rules.
Fogarty began by observicng after many years of consolidating by the big servicers, now it’s the exact opposite—they’re deconsolidating. Bank of America is the most obvious example, but there are others as well. So how is that going to change things, with smaller and medium-level servicers coming in to take up some of that space, the bandwidth that the B of As and the Wells are dropping out of? Is it going to be a whole new world or is it just a slight change?
Vella: It’s going to be a whole new world. You’re seeing the banks replace their legacy delinquent portfolios with new originations as new volume comes in. And then with Basel III and all the other implications on your capital and your balance sheet of holding MSRs for the bigger banks, they’re using their money and investments otherwise, other places. So the MSRs are trading, and then you have the appetites of these midtier servicers who are very good at managing delinquent loans and could actually make money at it if managed correctly. So you’re seeing that transfer of assets to these midtier guys, and it makes sense for them. That’s their business model, that’s what they do, whereas the larger banks, they now want to change from a balance sheet perspective, clean that up and take the delinquent legacy portfolios—either liquidate them quickly or sell the MSRs, get them off their books, give them to the midtier guys. And the attraction to the mid-tier guys are, they specialize in that. They know how to monetize it. And the cost structure of managing delinquent loans and advances is a lot more expensive if you can’t perform and you can’t get the assets liquidated or into loan modifications quickly.
Morris: As I mentioned before, I think there is a shifting of it. And to a great degree the regulators and investors in the loans are comfortable now, because that really can’t happen. You can’t just slough off your issues without your regulator or your investors agreeing where it goes and how it’s managed.
Fay: When it comes to the end of the day, smaller servicers and midsized servicers are just better set up for this type of a situation. We didn’t have legacy issues. We started from scratch five years ago, so we started and created the entire company based on this. That’s what a lot of the smaller and midsized guys were created for. A lot of the guys that are now becoming bigger players…if you look at their history, they used to be called special servicers, just five or six years ago, so they’re better set up for this trade. If you go back—and using Countrywide as an example, if you go back and look at their 10-Qs or 10-Ks from five or six years ago, it talks about driving the cost of servicing down. They were completely sideswiped by this level of delinquency that nobody expected us to have. And obviously Bank of America is dealing with that now, as are some of the other banks.
Fogarty: It’s the Countrywide portfolio. So you’re saying that servicers who got in the business after the crash, they’re interested in performing servicing rather than default?
Fay: The ones of us who got in after, for example, my firm was set up for defaulted loans, so everything in the way we do things is specifically for defaulted loans. And loans in default, it used to mean nonperforming. Distressed used to mean nonperforming. Distressed now means nonperforming, ARM, subprime…loans that are upside down. Those are all distressed now, they’re hard to deal with. If a loan’s paid perfect for five years but it’s got a 150% LTV, that’s a loan people are worried about, and justifiably so, and that is causing problems for big organizations that were set up on a different model for servicing. And John mentioned it before about how things have changed. Again, these shops just weren’t set up for this, and it surprised everyone.
Fogarty: And will specialty servicers have to migrate as the bad books of business get worked through? Will they be migrating into a more conventional kind of servicing, do you think?