Cost of Servicing Definitely Rising with Added Work
SAN DIEGO-Lender servicing costs are rising with additional workloads adding to the expense of processing loans with credit issues. And even investors are seeing costs rise, as more and more they look beyond what servicers can provide and bring in specialists of their own to do workouts to stave off foreclosures.
Attendees participating at a Mortgage Servicing News roundtable at the Mortgage Bankers Association's servicing conference here unanimously agree that due to regulation and processing demands servicing costs have gone up. It is a problem with both short- and long-term implications since cost is bound to affect pricing in times of major home value losses.
Federal- and state-level regulations created to prevent savable loans from falling through the cracks have resulted in higher costs by turning the mortgage servicing and loan modification process even more labor intensive, the panelists feel. In some states, due to new mediation laws servicers end up reviewing the same files more than once within a short timeframe.
And considering the high volume of loans reviewed and still coming into the pipeline, the additional work adds on processing costs.
Poor execution can also translate into higher costs.
Yet, adding government assistance to help lower these costs does not seem to be a plausible idea, they feel, as the added cost of complying with new regulations removes any net benefit from government intervention.
Participating were Steven Horne, president and CEO of Wingspan; Scott Goldstein, president of National Default Exchange; and Ron Deutsch, partner, Cohn, Goldberg and Deutsch.
HORNE: On the servicing side, what we're seeing definitely emerging is sort of the rise of the interventionist, the activist investor or estate builder, who is very frustrated with the relatively poor level of service they're getting from traditional servicers, and are at their own expense paying for specialists to come in and provide the additional expertise to work out more of these delinquent loans before they get to the REO or short sale space. And that's something that we see really emerging very, very rapidly right now.
From my vantage point, although the goals in HAMP have been very laudable and honorable, I think it's a little bit tricky to have more regulation. For instance, the borrower underwriting and qualification procedures are much more about insuring that one out of a thousand bad apples doesn't sneak through the process than they are about ensuring that these loans actually perform under the modified terms going forward. I can tell you half a dozen characteristics that correlate strongly with future portfolio performance and you don't need a thousand documents to get there. And so that, I think, has been a costly impediment to the success of the program.
GOLDSTEIN: New regulation that requires mediation processing at the state level may foster even more short sales, or deed-in-lieu. We have seen it in the states we operate. There are many cases right now where the servicer has the file in-house, they've tried all the loss mit they can, and they've come up empty. Having to push it to Maryland or Michigan, where we have mediation, by statute, the attorney in that state is going to put it through the same loss mit options that the servicer just tried and failed at. So it only makes sense to either do a deed-in-lieu or a short sale, or decide early on that this file should be referred for foreclosure at day 60, and not wait to do a modification because the state, statutorily, has to do a loss mit option. So if the servicer is looking to use the resources the best way possible, they wouldn't be spending a lot of time in Maryland or Michigan using loss mit because they'd send the file and decide to send it for referral.
Now, politically, this has ramifications that they don't want to address. But if you're looking at deploying your resources, in Michigan, any attorney that receives that file has to go through mediation. They're going to exhaust loss mit options in this state because they have to. The servicer is doing it because they want to and are trying to do the right thing beforehand. But to duplicate those services, they can take all those people that are working on Michigan and Maryland files and have them work in California and Georgia and refer the files.
However, to say we're going to refer files earlier for foreclosure is obviously not something they want to do. But from the business perspective, it makes sense. At least from the point that if now they know it's going to happen within Maryland or Michigan and go through mediation all over again, why not do a deed-in-lieu or a short sale?
HORNE: A lot of what we're seeing, though, is that the pressure on the political side is directed at getting the servicers to actually not just pretend to touch these things, but really dig into them. Now, there's real capacity constraint there, given the flood of assets. But believe me, we see, from our vantage point, regularly that the servicers really aren't working these loans very effectively. One of my favorites is, for instance, have more than one, but one in particular is that a servicer is trying to get a short sale through on the first, and even though the same servicer is servicing the second, can't get their own department to respond to them in time before the thing goes REO.
DEUTSCH: To the point on mediations, the state of Florida has just instituted required mediation. You're going to see a swell, if you will, of these things that have already been decisioned. And there may be some aptitude to that level of decisioning and review, to your point, but I think what that's going to do is every case is going to have to go back through mediation, every case is going to have to be re-underwritten, to a certain extent, relative to that loss mitigation avenue.