Servicers Must Respond to Investor Needs

More than 200 mortgage professionals turned out at the SourceMedia Second Annual Best Practices in Loss Mitigation Conference in Dallas where "innovation" was described as the answer to dealing with today's turbulent environment.

The new home sale market is relatively small today. It's only 7% of transactions vs. historically 15% or 16%. In 2010, existing home sales would actually be down 2% if it weren't for foreclosures, according to Ivy Zelman, CEO of Zelman & Associates, during an opening the conference address, "What's Next for Housing?"

The good news is the industry has worked through a lot of the inventory that plummeted home prices. Even more powerful, new home inventory is now down to about a 40-year low.

"This will give the market more confidence that production will continue as it replaces what we absorb and people still want new homes in certain parts of the country," Zelman told conference attendees.

Many servicers and lenders recognize there is a significant group of investors back in the market who are using cash to purchase real estate-owned assets.

For homes priced under $150,000, roughly 50% are cash transactions, according to data from Lender Processing Services. REO fund managers and others in the business can fix up these homes for minimum capital, flip to other investors or a primary homeowner and rent out those units.

"They are looking to monetize that investment maybe three to five years down the road and get a 6-12 type rental yield," Zelman said.

"It's an attractive opportunity for capital investment. But if you move up price point, the investment is not as compelling. You have to tie up more capital for longer and you don't get the same rental yield."

Among the borrowers who suffered fallouts under trial HAMP mods, roughly 34.5% made too much money, according to Zelman. Is that a strategic default if people go in willingly knowing they make too much money and it costs a lot of the servicers time and funds? Is there an alternative option for these people? She said the GSEs are "letting those people keep their trial payments" which she is "blown away by."

Eighty percent of the states have recourse because that should mean that people should be worried about walking away from their homes, she told the audience.

"They are not worried because the first-lien investors don't go after them. It's too expensive and they know that. Maybe their credit will be negatively impacted. But when you think of it, we're not a recourse nation."

During a keynote address, Tony Meola, CEO of Saxon Mortgage Services, said lenders, investors and mortgage servicers have to add "reputational risk" to the long list of challenges they are now being faced with as loss mitigators.

Every servicer in the industry has to deal with customer-relationship management and "develop a plan of attack."

Meola said, "The sad fact is 47% of the folks that go into foreclosure never talk to their servicer."

The servicing industry basically runs on two system platforms, unlike most other industries in the country or globally. It is known for precision and methodical approaches.

Today's loss mitigation has to be redefined. There are two goals, Meola said. One is to maximize the loans the industry services and there must be a focus on customer relationship management using efficiency to lower the cost of the transaction and to reduce anxiety in the process. This extends to not only reputational risk but also to that dialogue that has to happen for effective asset management.

Modeling, subjective matter/expertise, and transactional excellence, are major focuses to improving the process.

"As you talk to vendors, regulators and your employees, this is the time to recreate what you do. The basic formula we've lived by...time severity equals loss. I agree that has never changed. Speed to resolution has never changed. But it's more than a mathematical equation today. Investors dealing back to uncertainty today all have different needs and approaches across the country," he said.

"It's very hard for you to treat every single investor and constituent in the same manner and be equally effective."

Some investors are looking at 2013 as the "end of this" while some predict the year 2017. Servicers have to service those loans in a particular manner.

"Like it or not this large-scale standardized rigid business of servicing and loss mitigation has gone custom on us overnight. Now, this loan servicing elephant as we used to say is really more bobcat-like and has to react and move along the entire spectrum of its investments in order for it to be successful for every single investor."