Point of View: Servicers Challenged By Current Environment
Rick Glass has served the mortgage banking industry since 1983. Before opening his own the retained firm, specializing in nonprime mortgage sector executive search, he led the mortgage division of the nation's largest executive search firm. Mr. Glass can be reached at rick
Simple math tells us that all those 2/28 adjustable mortgages originated last year and already earmarked as the weakest subprime origination vintage on record, will be hitting their first interest rate resets next year, and for those borrowers already stretched to, and beyond, their financial limits, that will be an unwelcome calendar change.
Foreclosure and delinquency have been in the headlines all year. The subprime sector is against the ropes, reeling from an unprecedented combination of corrections including: a dry real estate market, tightened underwriting, and subprime origination activity is all but at a stand still, as credit spreads on those securities have more than quadrupled since last year. Add to these woes, rising delinquency rates, defaults, a lack of qualified loss mit professionals and greater borrower sophistication leading to more litigation and the mix is nothing short of combustible.
Some analysts estimate that nearly 2 million adjustable-rate mortgages will reset to higher rates through next year, which presents real challenges to mortgage servicers whose executives must deal with trouble they saw coming first, according to Teji Singh, Option One's former chief servicing officer.
She says servicers began detecting elevated early payment default rates, and hearing borrowers were overstretched, as early as the fall of 2006. By January this year, Teji says, "the whole industry knew we were on fire."
Some servicers are finding it difficult to cope with the increasingly problematic collections environment. Many of the traditional default servicing practices and tactics utilized in the past are not effective in today's uncooperative and stressed marketplace. With servicing costs on the rise and borrower connectivity difficult, best practices are being revised and innovation in application can prove beneficial.
In some cases, when the larger mega-lenders with gigantic portfolios have significant delinquency increases they may not have the bandwidth to manage the asset, forcing a sell-off or outsourcing.
Teji identifies "the piece missing" as "training" - or lack thereof - which has sent as many as half of all nonprime mortgage servicers offshore in search of greater efficiencies and control. Some put their toe in the water to "arbitrage" IT and administrative functions, while others, create captive entities, hiring and training FTEs who interact directly with customers, providing resolution and homeownership preservation.
SOLID LOSS MIT PHILOSOPHY
Servicers must weave a solid loss mit philosophy and implement it across their entire platform. This involves reducing the frequency and severity of loss through creatively addressing borrower needs a willingness to modify debt. This can be accomplished in many ways, including:
* waiving arrears charges,
* clipping coupons, and
* extending terms.
In all this, servicers ask: "What can I do to reduce payments to a level where the borrower can stay in the house?"
Are there limits to offshoring? Could the intense and sensitive nature of default Loan Servicing be conducted abroad, remain competitive and provide the savings arbitrage as advertised?
Offshoring is not a panacea. While the innovation has worked for some companies, Teji cautions that it is doomed to failure if attempted in a halfhearted manner.
Diane Pendley is in agreement. She is the plain-talking managing director, operational risk group, structured finance at the New York City firm that watches servicers very closely and rates their effectiveness for investors.
Ms. Pendley says that if a company sends business to companies outside the U.S. in a "staged and methodical way" it can work. She hears split decisions of servicers who would never do it and others who have tried and failed. Fitch rates 23 sub-servicers and has had to downgrade six servicers for inadequate practices.
Diane has been a strong proponent of piloting offshore campaigns in "champion-challenger" testing and retesting before committing offshore. She encourages platforms to proactively invest into these controlled and documented assessments to establish and compare overall benefit before committing significant resources.
Teji agrees with Diane when she says that "anyone in the market [today] has to...be inventive and proactive." The reason being the "extent of the [reset] problem is starting to become very apparent to everyone," as she says. And, that can not be corrected with "constant refis," anymore because "brokers have no place to put them today. The ride is over; borrowers will have to stay in these transactions."
Instead, there may be more short sales and modifications. Short sales, in particular, are going to be very prominent, Investors don't like that but we are already in an over inflated [price] environment.
The march offshore continues. According to a TowerGroup report, by 2010, offshore companies will have in excess of 10,000 employees and more than 1,000 of these companies will be concentrating on the mortgage business. Once again, do the math to see the major impact of this.
NEW MARKET PHILOSOPHY
Another servicing leader using innovation to deal with troublesome payment and servicing in this current market environment is EMC Mortgage.
John Vella, president and chief executive officer, says his company has gone "old school," which starts with personal borrower contact, early and often.
Servicers are more creative in addressing these markets. There is much more local outreach, even by large servicers - providing greater potential for better contact with consumer.
The new philosophy in this market," he says, "is asking how to get loans worked out with people eye-to-eye. The days of calling [late-paying] borrowers and sending letters, thinking they'll pick up the phone or answer their mail, are over," declares Vella, noting that EMC pursues "creative approaches to get a hold of borrowers."
One servicer reports that in a good market, it ran about 1,200 unit serviced, per FTE. Today, with increased handling it's as low as 800, as employees spend more time on the phone with each borrower pursuing:
* more work out solutions,
* more info gathering, and
* more listening and probing.
All this additional time on the phone increases the cost to service.
Other servicers report activity levels generally up 20 percent and the accompanying expense increase means this is not the time to let calls go unanswered. But finding enough qualified loss mit professionals is difficult.
Ultimately, there can be little doubt that innovation and creativity are requirements for nonprime loan servicers in meeting today's challenges.
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