Servicing Costs Rise
Servicing nontraditional products has become more of a challenge as potential default and foreclosure servicing costs keep going up.
"It is safe to say servicing costs are going up," said Ray Morris, vice president of sales and marketing, GMAC Mortgage, at the recent SourceMedia Mortgage Servicing Conference here. "That's a change within the past year."
The challenge for many shops he said is in finding the best ways to make the process profitable, such as higher process efficiency through outsourcing and a third-party site management.
Getting in touch with borrowers is another challenge, said Chip Hidinger, Fannie Mae acting director of nontraditional servicing. Many borrowers are taking the no-call approach "adding to the challenge" of servicers trying to come up with a resolution for a specific loan. It is hard to determine what is the best way to communicate with borrowers, he said. "In the end, what matters is trying to put them back into homes ... even if it's going to be at a 5% rate."
The unprecedented number of adjustable-rate mortgages, especially interest-only payment option ARMs, about to resettle, which represent anywhere from 20% to 30% of all loans, or one in five loans issued between 2005 and 2006, make the above issues even more important for all servicers.
When dealing with ARM resets, Mr. Hidinger noted, it is imperative to inquire whether after the reset the mortgage will still be affordable to the borrower and come up with loan modifications. Since about two-thirds of subprime loans do not limit the amount of modifications, he said, there are other options to explore.
Servicers, however, should be careful, said Scott Holzmeister, Wells Fargo Home Mortgage senior vice president of nonprime collections and loss mitigation. "Just don't do a blanket modification."
Moreover, beyond the bad reputation they tend to give servicers, customer advocacy groups also help the process. These mortgage surveillance groups assist borrowers in reviewing their mortgages, which in the end is helpful to all parties.
In addition, financial education and customer understanding of their ARM loans will also affect the whereabouts of their mortgage loans and potential defaults. For example, according to Mr. Morris, a GMAC survey has found that the average person tends to understand home-equity lines of credit better than pay-option ARMs. To assist customers, he said, GMAC sent out a brochure that explains the product and helps borrowers understand their payment-option ARM loans.
Consistently contacting borrowers in different regions is key in today's servicing marketplace, Mr. Morris said.
Strategies that handle the wide variety of nontraditional products differ. For instance, Mr. Holzmeister said handling second-lien products tends to be more difficult and time consuming. The result depends on both what is being settled and what side the servicer is sitting, he said. "But make sure you don't foreclose when you don't have to.
"We have thought that the solution for securitized loans coming up with adequate terms for a repayment plan has always been in the forefront of the securities industry," Mr. Holzmeister explained. "What has changed now is that with loans resetting every six months, compared to every eight to 12 months, the picture changes. It is a challenge because repayment plans become less and less effective when dealing with the ARM programs."
The biggest challenge today, Mr. Morris said, is that there is always going to be a need for subprime products. As it has always happened in the real estate market, he added, "people will adjust. What is here to stay is that as products become more complex, we'll get more calls from customers."
From the process standpoint, Mr. Hidinger said, what servicers should watch out for is be effective. A recent trend, within the past six months, he said, is that servicers are conducting more loan reviews both onsite and offsite.
Technology has helped, Mr. Holzmeister said, as today's portals allow for "much better product reviews" and guidance for all parties involved.
"You have to service in the best interest of the whole," he said. "If you jump out of any of the PSA agreements it may become damaging. It is difficult, it's a juggling act, as to where you keep the balance."
Questions to ask, he argued, include whether the product is affordable and whether there are refinancing options.
A past subprime market problem servicers should keep in mind, Mr. Hidinger added, is research findings showing the number of subprime borrowers who would have qualified for better loans was very high. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com