The Experts Talk: From The REO Trenches
The panel at the MBA National Mortgage Servicing Conference discussed the state of the mortgage industry and what it means for the REO component of the business. Additional coverage of the discussion can be found in Broker Magazine and the online versions of Managing REO and Fraud & Compliance Report.
Ted: One of the implications of this rise in fraud and early payment defaults is that lenders are going to have to manage a rising collections and REO workload. What are the strategies for dealing with what appears to be a rather sharp increase in defaults and foreclosures?
Cary: One of the things servicers can address is the early payment default technologies to tap into that, understanding and establishing a relationship with the borrower upfront. As everyone knows, the first payment is the most important payment. Part of the problem, whether it's fraud or whether it's just the customer not knowing who to send their checks to, a lot of times these servicers who ultimately buy these loans get the loans with several checks in the file. They have shown up to the party after the party took place. So there has to be a connection between the lender and the ultimate servicer.
Allan: I met with a very large servicer this morning, an executive within their REO management. And he said the size of their REO portfolio has doubled within the last year. And that in addition, historically, they have done actually preservation and repair work on 9% of their properties. He projects they will double that or more than double it to 20% over the next year, because he feels they have to do more to make the properties marketable to sell in a soft real estate market.
So if you double the size of the portfolio and then you double again the number of assignments that need to be done, it's a fourfold increase for his staff. We can all imagine the enormous workload that is underway in REO management. Their default rates are rising. They have heavy losses from the defaults and then in addition to that, they require more staffing to manage the REO process.
Chris: All of our clients have reported increased volume and they are all looking at how best to deal with that. One of the benefits our system provides is efficiency, and to gain that efficiency you really have to look at your process and you have to refine that process. The problem that they are facing is that you don't want to undertake revamping your process in your busiest time, with record volumes, when you have to focus on the business. But we have seen some lenders, and it has paid off exponentially, actually take people and resources and dedicate them to redefining the process and understanding what they need to do and what is imperative in their process.
From a technology standpoint, especially on the tail end of foreclosure and on into REO, there seem to be multiple systems and multiple platforms that everyone is working in. By combining down to one system and through data integration, really touching the data once instead of five times, they are able to dramatically increase their caseload with existing staffing.
Jennifer: Do you think outsourcing will increase in 2007 as the year progresses?
Chris: I absolutely think outsourcing is going to increase. What I've seen is that lenders have about a 15% to 20% variance, they can increase to that point. And then they just can't hire enough. They can't train fast enough, so at that point I think everybody starts to look towards outsourcing. The other thing I've seen is that people are very aware of what's coming for their workload. So going back six months, going back a year, a lot of lenders and servicers have put relationships in place with outsourcers at very low volume.
But they are now reaping the benefit of having those relationships, because as they hit that 15% to 20% variance in their growth, they can go to those existing relationships and just grow the volume of outsourcing.
Cary: With the influx of REO properties and the influx of defaults, lenders and servicers need to go to the experts. Each outsourcing vendor has a unique business proposition. They are very good at what they do, and that's what they focus on. And lenders for the most part are jacks-of-all-trades, masters of none. And when you are in a situation where your REO is going to increase beyond your capability, you need to go to someone who that's all they do.
Allan: I think that it's very clear that the industry is going to national providers for outsourcing of national REO preservation and complete REO disposition functions. And the reason is that lenders have an opportunity to greatly reduce their risk by working with national vendors. I was talking earlier about managing 6,000 REO brokers. You can imagine the difficulty of making sure that 6,000 companies have valid insurance in place at any given time. So we see this as an ongoing industry trend that will not end anytime soon.
Chris: I do think outsourcing will increase. A lot of lenders are faced with challenges with the way the market is right now. You have increased volume and increased scrutiny. There are much tighter compliance issues. They have maxed out internally and have to start outsourcing. Whenever you outsource you intrinsically give up some level of control, but the environment in the industry right now is to tighten control, so there is a real dichotomy. It is being solved by technology and the transparency that technology provides. It really is a difficult time to outsource. It's something you have to do, but it's difficult to do.