When It Comes to Servicing, Go Cheap

Is anyone really surprised that Astoria Federal finally pulled the ripcord and decided to exit the business of servicing residential loans? Probably not. In fact, we may very well see many other Astoria Federal-like shops decide to outsource their servicing to firms such as Dovenmuehle, Cenlar, GMAC, Countrywide, take your pick.

For those of you who aren't well acquainted with Astoria's decision to outsource the servicing function, let's review the basics: According to figures compiled by Mortgage Servicing News, at mid-June, Astoria serviced $10.7 billion in home mortgages, ranking 48th nationwide.

On a market-share basis, Astoria controlled a meager 0.14% of the U.S. residential loan market compared to 12.1% for industry leader Countrywide Home Loans of Calabasas, Calif.

Let's face it - Astoria had no designs on being a top 20 ranked servicer, but like many firms, wanted to keep tabs on its customers. Sometimes, a shop that isn't making a whole lot of money on its servicing operation will stay in the business anyway because they want to maintain a basic core relationship with the customer with the hope of cross-selling other financial products to Joe and Mary Sixpack.

Was Astoria having trouble servicing loans? No, not at all. Announcing that Astoria was outsourcing its servicing function to Dovenmuehle, company CEO George Engelke Jr. noted that the thrift's servicing division "consistently performed at high levels." As far as its delinquencies are concerned, they're at record lows.

So what was the problem? Astoria is publicly traded and according to Mr. Engelke, a well-regarded industry veteran, "We must and will strive to increase operating efficiency in all aspects of our operations." (Stock analysts love that kind of talk.)

Initially, Astoria will take a $1 million hit to shift the servicing portfolio to the privately owned Dovenmuehle, which is headquartered in Illinois. (Keep in mind, Astoria will, technically speaking, own the underlying servicing strip.) Next year, Astoria hopes to save at least $2 million (pretax) by having Dovenmuehle handle the servicing chore for them.

As we all know by now, the servicing of residential loans is a scale game where the lowest-cost servicer is the one that survives. But how does a shop become a low-cost servicer? There are a few answers to that question. Any firm that is serious about staying in the business of servicing must locate its platform in a low-cost area. Long Island, where Astoria is headquartered, is not a low-cost area. Home prices in Nassau, Suffolk and Queens are among the highest in the nation. If you want to see some outrageous real estate tax bills, check out the notices sent to homeowners who live on the north and south shores of Long Island.

Firms that are serious about being a low-cost servicer need to locate their servicing operation in towns were housing is relatively cheap and labor is plentiful and somewhat cheap. I'll bet you a steak dinner that any top 20 servicer with a servicing facility in New York, San Francisco or Los Angeles won't be there for long. Want cheap housing for your workers? Think of Florida, Texas, Iowa, North Dakota. Think Rochester, N.Y., where there's plenty of colleges and tons of reasonable-priced homes - and workers who got laid off from Kodak and who want decent jobs.

The two other keys to being a low-cost servicer involve technology and the hiring of good people. If your shop has avoided making the technology plunge don't avoid it for too long. Computers and good software increase productivity. And enough can't be said about skilled customer service reps. Talking clearly and coherently to late paying mortgage customers can turn a delinquent mortgage into a current one.

Now, even if your shop is doing all that, management (and shareholders) still might decide to outsource the servicing function - maybe even to India. Who knows? One thing is for certain - servicing consolidation will continue to steam roll. The trend isn't reversing itself. Now is the time to make that fateful decision - either get smart, get cheap or get out.

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