The higher rate of arrears and post-pandemic rule changes impacting government loans present operational hurdles that collectively represent an occasion to rise to, according to LoanCare President Dave Worrall.
"Government loans are a great opportunity to keep a default management organization well exercised and ready," he said in a recent interview.
As a longtime distressed servicing expert whose career goes back to the Great Financial Crisis, Worrall said his experience has prepared him to contend with current challenges like the Federal Housing Administration's
In an edited and condensed version of his comments that follows, Worrall explains how his experience informs his current work and view of where the market stands in the current credit cycle. He also shares a surprising prediction for artificial intelligence and his outlook on industry consolidation.
Career path
WORRALL: I started at companies like GMAC-RFC and later worked for Fannie Mae. I was frequently involved in discussions on how things are supposed to work in servicing around 2007, especially in situations where there was credit that was sensitive.
Then 2008 happened, and I ended up in charge of a significant portion of the national servicing organization at Fannie because of my operations background. I was responsible for various servicing oversight operations, including smaller relationships.
One of the things I worked on was the
That led to a position with CitiMortgage. Citi was one of the banks that did the bifurcation of "good" and "bad" assets. Citi had a servicing organization dedicated to
I was there for a really short period of time before I got a great opportunity to go to RoundPoint. I then became president of LoanCare in 2016. It's one of the largest subservicers in the country.
Key components of my background that influence how I conduct my current activities include my time at Fannie, where I was responsible for many servicers, and my extensive work with risk and compliance. I have done a lot to address credit risk and worked to help allow borrowers retain homeownership when they have had the capacity and the desire to do it.
We focus on having a strong default management practice that is ready in the event we're confronted with an economic downturn. We're very focused on government loans, which are more credit sensitive than Fannie or Freddie Mac mortgages. Government loans are a great opportunity to keep a default management organization well exercised and ready.
It's been so long since we had a real downturn. There are a lot of companies whose lifetimes don't span a down cycle. Some of the new entrants think they have it all figured out, and they've never been through something like 2008. It requires you to focus on things and have capacity and scale to do things that you wouldn't ever anticipate unless you've been through it before.
The current state of the market
WORRALL: One thing you learn being in mortgage is that it's a cyclical business. Refis go up and down. Defaults go up and down. It's been a really long time since we've had a real down in defaults and I don't think we're there yet.
I listen to phone calls every day with our borrowers. I think it's important to have to take the pulse of the market that way. I don't hear anything significantly different now than I did a year ago, except maybe the beginnings of some stress, but nothing outside what is in the national news.
I expect at some point the normal cycles are going to return. So, as a company, I feel it's really important to be ready.
Things have really changed over the last few years in policy. The government, I think out of necessity, has been moving a lot faster, and requiring servicers — especially those with large government portfolios — to make changes with significant implications over lots of loans quickly.
I think this is going to become a growing need as we move forward in time. We've invested in technology that allows us to be flexible when things change programmatically.
A lot of the delivery mechanism nowadays for those programs is a consumer-facing digital experience. We want to be able to not only support what happens in the back office when these programs change but also roll things out quickly to customers.
We took all of our consumer digital in-house five years ago and it's helped allow us to respond with the speed now that the government is requiring. We're really fortunate, because we've got a Fortune 500 parent company that is very supportive of long-term investment, so we can afford to support those kinds of technology initiatives to respond to program changes.
I think we were one of the first companies in the country to roll out
We host the consumer experience for the vast majority of our client base. A lot of clients want to own that interaction. They originate and they don't want to lose the connection with the customer, so we built services that directly integrate into clients' own consumer digital experience.
We can do everything we need to service loans through that integration with the client, and the client can stay in front of the customer. The client wants to retain that relationship if the person decides to purchase a new home or refinance. That is becoming increasingly more important when you know when you look at what people are paying for servicing rights. There is a lot of competition when it comes to recapture programs.
Banks, for example, want to have multiple product relationships for each consumer: checking, savings, and retirement accounts. So control of the digital consumer experience is really important because it allows them to aggregate all these services in one place. Mortgages have always been a foundational part of a bank's financial relationship with a customer, so having the servicing inside the digital experience that they host is critical for them.
A lot of banks have historically made decisions about their subservicing based on wanting to keep it in their ecosystem. They can leverage the operations that we can provide as a subservicer and still do that. It's all facilitated by advances in technology that we didn't have 10 years ago.
On artificial intelligence
WORRALL: I think it will affect literally everything we do in 10 to 15 years or maybe 5-10. It is the single most significant thing that we're investing in today. I could go through 50 different use cases that I expect to have an impact on my business but I think it is going to take time.
An example of that could be related to how the agencies ask servicers to contact borrowers who are in a default situation. They lay out contact requirements regarding how you should attempt to get in touch with a person a certain number of times during a particular period.
Those are the kinds of requirements to think about when when you look at what you can do with AI to evaluate the right way to do that kind of outreach to customers. You can look at the data that you have about those customers and what their preferred contact methods are or what their payment patterns indicate, such as their default propensity. With all of that information, you don't really need to rely on a set of rules that's ignorant to all of those unique attributes of the customer.
You can come up with a much more effective way of doing outreach if you rely on those tools, but that may require a policy change at the agency allowing you to use that approach versus, say, a call once every seven days, but no more than every seven days.
I think it's going to take awhile for all the regulatory entities that oversee how servicers do business to adjust to what's possible and use all these tools and their new capabilities in a way that is in the best interest of everybody involved in the transaction.
It is kind of like the Internet. It's a relatively recent occurrence that some people have preferred to interact with their servicer digitally. It used to be that nobody wanted to do anything online. They preferred to call you and talk about a servicing issue because it felt like there was more security in having a voice conversation than doing it online. That's reversed. People generally would much rather do their business online. How long have we been online now? It's been decades and it's just relatively recently that people have changed their interactions to be predominantly digital.
There are tons of exciting things that I think AI is going to open up for us, and it's a matter of figuring out the right way to do it in a manner that complies with laws and regulations, some of which haven't been developed yet. Once all that settles out — and who knows when that will be — this will be a very different industry.
The outlook for consolidation
WORRALL: I don't really keep up with what's going on with
You have to have the ability to invest in these technologies that are not cheap, and it's going to become increasingly important to make long-term, large scale, enterprise-grade technology investments.
I think a lot of companies are looking at that. Servicing is already a low margin business. If you've got to make those kinds of investments and do that over an extended period of time — and I do think we're talking decades here — you have to look at whether that is a business that is viable if you don't have scale.
I think a lot of people are doing gut checks now on that, so I think consolidation will continue as people look for scale so they can justify making the investments that are necessary to continue to be competitive.
As far as government servicing goes, I do think the numbers are thinning a bit there. Companies that have been historically very focused on that kind of credit are getting consolidated into companies that maybe haven't been. If we are at the beginning or in the beginning stages of a default cycle, we will need companies that are focused on default. That's why I feel positive about LoanCare's business. We are ready. We've historically been focused on government credit and default work
We have talked to a lot of clients who are involved in the various consolidation activities that are going on, and I think the most common questions that we hear are about what the what it means in terms of other businesses that the consolidator has. These often aren't consolidations where a pure subservicer is buying a pure subservicer, but rather where companies with multiple lines of businesses are buying a servicing entity. If you're an institution that's really focused on your customer relationships, you may have questions for a company that may need more of the same kinds of customer relationships.
As a subsidiary of the large publicly-traded insurance company, we have a stable owner who is fully supportive of our long-term growth and shown a history of continuing to invest in LoanCare. They don't need to sell us and have shown a long-term commitment to the subservicing business, but any opportunity to acquire to grow scale, we certainly would evaluate.
