Originators Teaming with Servicers on Some Loan Mods
Loan modifications have been generally handled by the servicing side of the business but lately there are increasing questions about which regulatory category it falls into that could lead to more originator alliances in the area.
"I think over time you are going to see more of those partnerships develop," said Mike Radesky, chief operating officer at Titanium Holdings.
"If you're doing anything that looks like a refinance" there seems to be increasing concern that one might have to in some cases comply with "if not the federal SAFE Act, at least the state-passed SAFE Act-type legislation," he said.
Loan modifications are generally distinct from refinances, as the former is only used in situations where there is not sufficient equity for the latter, said David Green, president at The StoneHill Group.
But while refis usually are considered to be originations and short sales are clearly considered collections work, there is some ambiguity when it comes to mods, which lie somewhere between the two, said Rick Seehausen, president and CEO of LenderLive. He said that while he is not a compliance expert, like Radesky, he feels there is "not a clear ruling on modification negotiation" and there have been increasing questions about whether it is subject to NMLS examination.
"That's a pretty big shift for a lot of servicers to adjust to," he said.
The concern is seen in outsourcing as well as direct servicing situations when it comes to mods. There are "more and more questions," about what outsourcers are doing on behalf of servicers and how directed by the servicers it is, Radesky said.
So far, the key word seems to be "negotiation," he added. Transmitting documents may not cross the line, but once anyone starts working out terms of a modification with a borrower, originator licensing could be required.
"I would anticipate the industry's starting to push that direction a little bit," he said.
Seehausen said it is a situation where there are questions about whether those handling modifications should be licensed originators or licensed debt collectors or perhaps both.
Radesky said he feels the licensing requirements are well intentioned, but there is some concern that it could constrain companies' ability to handle modifications and serve borrowers efficiently if it becomes a more complicated effort to staff.
"A modification decision is not technically a new loan," he said. "If you're doing the decisioning I could see on the extreme where you would want to see an origination license."
Decisioning, he said, has "so far been the distinction," but that could change. Radesky said he feels if it does extend to those "just gathering the data and bringing it back to the servicer" it could become "onerous."
When asked whether the licensing question creates opportunities for originators in the loan modification area, Seehausen said that he feels modifications are still more of a default management tool and requires a different skill set than origination sales. In contrast to the latter, which historically has been a "highly incented position," there are only "mild" incentives for modifications.
However, there have been and may continue to be some loan mod and servicing opportunities for originator support staff and some lending executives, said Jay Loeb, vice president and principal at National Credit Collectors Inc.
Operational executives skilled in providing efficiencies for lenders have moved over to the servicing side of the business, he said. Loan modifications can be "very much like underwriting a loan" and former lender support staffers have helped process them. When members of a loss mitigation team have backgrounds on the lending side of the business it can "really help," Loeb said.
When asked what current challenges such as loan modifications and strategic defaults could mean for originations going forward, market participants had mixed opinions as to whether the relatively large number of bankruptcies and other credit history blemishes from this period would prevent borrowers who had them from getting loans in the future.
Green said that based on what was seen during the oil crisis and savings and loan crisis back in the 1980s he does not think it "will have a lot of effect on people's future."
"The number of bankruptcies was so high that...it was not a big strike against anybody," he said.
Others such as Loeb said they did not think this would happen. "If it does, it's a moral hazard," he said.
As to how long modifications will be a relatively large part of the market, Leonard Ryan, president at QuestSoft, said he believes there is "more optimism today than six months or a year ago."
Green said he agreed, but he added that he thinks there will be at least another 18 months before the market turns around. He said the effect of mods is somewhat difficult to track because while there is some standardization when it comes to the government's program, many other forms of mods are used. "Every lender has a different opinion on how or what to modify. There is a lot of diversity," he said.
"I think we're going to see a lot more modifications" and that REO will continue to constrain housing recovery for some time, he said.
Green said he believes employment more than modifications running their course will determine when originations will bounce back. "If you don't have jobs you can modify 100 times and you still can't make a payment."