Special Servicing Growth Challenges

Mergers and partnerships are driving the special servicing market expansion as some servicers exit the market or sell their mortgage servicing rights and others get into the game through new alliances.

The highest activity is among servicers who choose to sell their mortgage servicing rights on portfolios they do not own so they can focus on retaining their in-house servicing, “which requires a certain kind of discipline and expertise,” says president of LoanCare, Gene Ross, who before joining the servicing division of Fidelity National Financial Inc. served as president to four federally chartered thrift savings banks.

There is “real opportunity” to grow according to Jim Cutillo, CEO of for Stonegate Mortgage of Indianapolis. Not only. The private mortgage lender and servicer aims to gain significant market share over the next two years. So far revenue for the first quarter was up 261% over last year and the servicing portfolio has also doubled in size, a company spokesman said.

The firm’s Eastern regional VP of retail lending, Mark Etchison, sees potential for “exponential growth” of the retail branch network in less than two years.

Stonegate recently entered into a partnership with Long Ridge Equity Partners, a New York-based private investment firm. Backed by Long Ridge, Stonegate acquires loans and retains the mortgage servicing rights on retail, wholesale and correspondent basis through a network of retail branches and approved third-party originators. Growth expectations, executives say, are based not only on in-house resources and aggressive strategy but also market prospects.

More companies are entering the servicing space due to market consolidation. The buy-and-sell activity is up thanks to narrowing price differences and availability of distressed properties for sale. For example, HUD has been more active in auctioning nonperforming assets conducting them almost every quarter, Ross says. But it’s a tricky market. The prolonged foreclosure crisis continues to change the mortgage servicing market and the special servicing definition. “It is more important than ever to understand what constitutes special servicing,” what types of loans feed a servicer’s portfolio of distressed loans in need of a workout.

The perception is changing with the reality. In the past “most would agree that a special servicing portfolio of largely nonperforming loans was acquired at a discount” by hedge funds or private investor groups. The executive argues that while that still is true today, some of the most unique portfolios require a more high-touch servicing approach that help minimize delinquencies, prevent foreclosures or seek liquidation options.

Special servicers are now rated based on staff expertise, proof they can process difficult portfolios that have a higher propensity for delinquency, foreclosure and bankruptcy issues, and loan review process efficiencies. State regulation alone is changing mortgage-servicing platforms across the nation since noncompliance is an added risk for both the investor and the servicer.

Some companies are looking at solutions to their distressed portfolios “that not necessarily meet the traditional definition of servicing,” Ross says, but require more narrowly specialized mortgage servicing expertise. In today’s environment such expertise may include the MERS reconciliation process, loan portfolio document reviews, third-party reviews from vendors and foreclosure attorneys, in addition to a myriad of regulatory changes.

The pool of servicers and subservicers that can provide specialized services still is relatively small compared to demand, he said, which is why his company has seen “extraordinary growth.” LoanCare is a nonlender that currently services nearly 130,000 loans totaling approximately $18 billion and also provides loss mitigation, foreclosure facilitation and bankruptcy monitoring.

It has been widely reported that consolidation has brought to the market various types of entities including nonbanks. As Bank of America, HSBC and other major banks exit the wholesale market they have created new opportunity for smaller entities to fill the void. “In filling the void,” Ross says, they are seeking to sell directly to the GSEs and are choosing to retain servicing even though they may not be qualified for the job. “Servicing is complicated. In my opinion many do not understand the complexities of retaining servicing.” Hence, to maximize their investment, they seek partnerships with servicers that can assist with processes and technology, which in his view is the most efficient type of assistance nonbank servicers can use to get up to speed.

Many have shifted from being originators who were not retaining the servicing rights to originators who already have significant portfolios in their, to originators that retain servicing, too, and who need data transparency to be able to evaluate and analyze their portfolios. Expertise is important, but having a strong company that not only is profitable but has the capital to support the ongoing investments in technology and servicing that are now needed to keep up to date with market changes. ”It is a never-ending process,” he argues.

Another challenge is finding the right third-party servicer. Mortgage banks trying to evaluate and recruit a special servicer’s level of expertise. For example, servicing GSE loans is very, very complicated. Banks may inquire through Wall Street ratings, financial statements, industry reported lists of special servicers and subservicers, references “and eventually, go to their shop, kicking their tires, meeting their people, looking at their technology and functionality across the whole spectrum of servicing. It is not an easy process, but it is not as simple as looking into the Yellow Pages. There’s plenty of information available.”