Default Profits Can Beat Expenses
PARK CITY, UT-Lenders are starting to question servicing's traditional role of minimizing costs in a default. Now, they are beginning to see defaults as a profit center, rather than an expense.
Default servicing can't be done on the cheap, but it can save more money than it costs, a panel of specialists in the "art" of turning bad mortgages back into good ones maintained here in late February.
There's more than enough upside, they agreed at the Midwinter Housing Conference, to make up for the extra cost.
"Good default servicing is relatively expensive," said Steve Horne of Wingspan Portfolio Advisors, Carrollton, Texas. "But stakeholders who make the decision to spend a dime can save themselves a dollar."
The panelists maintained that the traditional servicing model is broken and not likely to return, if only because it is folly to think that old-line firms are equipped to handle every stage of delinquency. What is required today, they said, is a specialist whose focus is on producing profits, not minimizing costs.
Panel moderator Tom DiMercurio of Paradigm Default, Denver, likened the default specialty as "guerilla warfare" and said "intervention servicing" can't be done for just 25-50 basis points.
"High touch is in, lowest cost to service is out," agreed Todd Wallace of Acqura Loan Services, Plano, Texas.
Former regulator James Lockhart, who now is vice chairman of the W.L. Ross & Co., a private equity firm for which he focuses on financial services and the company's mortgage recovery fund, told the conference that fee-structure servicing was "not created for this marketplace.
"The whole world of servicing has to be rethought," said the ex-director of the Federal Housing Finance Agency, the entity which oversees the mortgage-related government-sponsored enterprises.
But firms like Wingspan and Acquara said they've already done that, and that they've come up with specialized servicing systems that work.
Traditional servicers not only lack the monetary incentives to work problem loans, said Wingspan's Mr. Horne, they lack the proper tools. Consequently, they focus too much on "weeding out the few bad apples" and not enough on helping the maximum number of borrowers.
"In the mortgage space," he said, "it makes no sense to expect one servicer to handle every type of problem loan."
"There's an art to special servicing," agreed Mr. Wallace, who was in charge of capital markets for WMC Mortgage for 10 years and was responsible for the sale and securitization of some $100 billion in loan production over that period.
Acqura operates on a value-based model as opposed to a volume-based one, he told the meeting. Instead of scripted collection efforts and canned reports, it uses what he called "artful," high-touch connections and analytical tools.
He also advised investors to act quickly, noting that the failure to engage a specialty servicer as soon as a loan goes 30 days delinquent can cut dramatically into cure rates.