Subprime Faces Cost Pressures

Additional regulatory scrutiny and litigation risk inevitably may push up the cost of servicing subprime loans, some of the industry's leading experts said at the MBA National Mortgage Servicing Conference here (for related MBA coverage, see page 17).

And the added risk is causing subprime lenders to redouble quality assurance and customer service oversight.

"We just cannot afford to have our brand names or our parent companies dragged through the mud because of sloppy servicing," said Art Lyon, president and CEO of HomEq, a subsidiary of Wachovia. "There is just no way to cut corners on quality anymore and have a viable servicing entity."

John Vella, chief servicing officer at Option One Mortgage Corp., also said that new risks in the market are putting upward pressure on servicing costs. He said servicers need to hire well-qualified people and monitor business partners closely.

"In today's environment, the risk associated with outsourcing is a lot higher," he said, noting that vendors are essentially an extension of the servicers own shop.

In addition, he said Option One is putting increased emphasis on training to ensure that servicing employees know how to manage the risks they encounter.

"A big piece of our cost per loan is dedicated to training," Mr. Vella said. He also said that in today's environment, Option One is willing to spend money to mitigate risk.

While scale and technology are helping servicers manage costs in some areas, both Mr. Vella and Mr. Lyon say the risk associated with servicing mistakes makes it incumbent on lenders to strengthen controls and monitoring procedures.

In the collections process, industry players are finding that establishing the right customer contact in the collections process and getting in touch with that person is a critical factor in minimizing the number of loans that roll over into foreclosure.

Mr. Vella said that in the subprime world, where borrowers are often affected by "life events" that precipitate a serious delinquency or default, patterning borrower behavior can be difficult. That makes it all the more important to contact the right party to see if a deal can be worked out to avert foreclosure.

Mr. Lyon said that foreclosure is inevitably the result of some failure on the part of the borrower or the servicer, and HomEq wants to make sure it does not happen because the servicer failed to explore all the alternatives. He also said that HomEq emphasizes early-stage delinquency management and is careful not to use foreclosure as a weapon.

"Threats are not the way we communicate with our borrowers," he said.

And the issue is starting to get the attention of rating agencies as well. Analysts at Moody's investors service, for instance, recently told MSN that regulatory scrutiny, litigation and media attention may put upward pressure on subprime servicing costs as lenders strengthen controls and procedures to combat charges of abusive loan servicing.

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