When you speak to servicers nowadays, the number one concern many companies are battling right now is complying with new industry regulations.
Earlier this year, the Consumer Financial Protection Bureau released nine new servicing rules that are set to take effect at the beginning of 2014. With the deadline date looming closer every day, servicers continuously are determining the best practices they need to implement in order to remain in compliance with these regulations and still have a profitable business.
Operations professionals in mortgage collections and default servicing need to become more compliance-minded than ever in order to avoid severe financial penalties and to remain competitive in an ever evolving marketplace.
At National Mortgage News’ annual Mortgage Servicing Conference in Dallas, Mark Fogarty, editorial director of the mortgage group at SourceMedia, moderated a roundtable discussion to see what servicers are doing to prepare for these new rules.
Joining Fogarty in this panel was Evan Nemeroff, reporter for National Mortgage News; Deana Elkins, vice president of compliance solutions at ISGN; Michelle Rowley, product strategy and marketing manager for CT Lien Solutions; Wes Iseley, senior managing director at Carrington Mortgage Services; Chuck Newcomb, chief operating officer for BestAssets; and Aaron Luburich, an executive with Accenture Credit Services.
In this portion of the discussion, participants described some of the challenges they are facing due to the new CFPB rules. They also explain what a servicing shop might look like in the future and whether or not a servicer needs to integrate their servicing and origination segments into one.
Compliance is certainly what people are talking about, said Fogarty. “We published the summaries of the nine rules the CFPB has put out for servicing. What compliance means to you and how you can profit by it or be hurt by it?”
ISELEY: From Carrington’s point of view, it’s kind of multifaceted. So you have your internal from your own book, plus we do a lot of work for some of the larger banks. From a compliance standpoint of being ready and compliant and doing gap analysis so whatever their held to, we’re held to. So the whole compliance standard is a lot higher than it used to be for nonbank servicers.
FOGARTY: So good for vendors. It gives you certain products to develop.
ISELEY: Yes.
ELKINS: I’m working with a team and one of our goals at ISGN is to provide those clients with the ability to assess those gaps and risks in their policy procedures processes what they do according to the new CFPB rules and changes.
FOGARTY: It certainly looks as if servicers are being targeted for compliance right now. Do you think the level of compliance being asked of servicers is too much, just enough, not enough? How would you assess the current environment?
ELKINS: I don’t think it’s too much. There are some rules that may be harder on some of the smaller community lenders and credit unions. But the structure is something that has been needed to help it be a more standardized process throughout the whole industry. There is some benefit to that as well.
ROWLEY: It isn’t too much or too less, it’s more in line with something that we feel is the best practices path anyway. Servicers needed to be more profitable and transparent. Relationships between the servicer, subservicers and the attorneys have always been problematic, whether it’s been document sharing or anything else. So we feel that the Dodd-Frank or Basel III requirements in terms of transparency and the document control aspects are really good implementations that servicers will benefit from in the long-term rather than feel the pain of the regulatory fits coming down on them.
ELKINS: One of the big focuses I see reading the CFPB rules and regulations are what kind of controls are in place? How many things do you have that are manual that can cause human error? What can you do to automate that but make sure your system is automated the same time?
ISELEY: From actually spreading technology and process and communication flow across for everything we try to do is provide the most information or data to the person talking to the customer as possible, so the whole customer satisfaction and relationship has improved because of technology.
ELKINS: The shift and focus used to be that all lenders were concerned about these are our standard rules and this is how we’re going to work, but the customer focus was left out of that. Now, the whole CFPB focuses on the customer. So now we have to work towards really trying to take care of those customers and make sure they are the total focus.
FOGARTY: So what will a servicing shop going to look like five or ten years from now?
ELKINS: I would say those that have the strongest compliance experts and the best type of technology where they can offer standardized systems are the ones that are going to come out on top.
NEWCOMB: Compliance is brought on by what happened before. It also drives common sense. We got away from what we knew were the right things to do and got to where we are today. I came up in a time where we knew that compliance and whether or not it was a bad loan, but technology drives it all. I think the servicing shop that was before was really lean as the margins were really low. I think it has to be a more all-around shop. They never had anything that contacted customers. They always sent a letter and went from there. And we’ve proven now that foreclosure can be an extensive process, people can be rehabilitated in their mortgages and it can be profitable. So a servicer will have to be able to talk to customers and handle all the different things and just foreclose.
ELKINS: They also have to be able to validate that they did all of this when they get an exam. That’s one of the things a lot of people are focusing on. They may put those processes in place and know they are doing them, but if they haven’t had their work assessed to determine if it is being done properly, they don’t see that. And when you do the data analytics and put it all together with the actual consulting of what they’re looking at, then it’s a big picture and they can see what needs to be done for improvement to help them out.
FOGARTY: So an audit trail.
ELKINS: Yes, absolutely.
ROWLEY: Along with that audit trail comes reporting. So the optimal servicing shop would have data points, whether it be data through integration opportunities or as backend office systems behind servicing legacy systems they might be using, ones that are dynamic enough to export data that is needed for that audit trail is critical.
FOGARTY: One thing that I am seeing that I haven’t seen in many years of covering the business is servicers starting to get into the origination function because when they do the loan modifications, they are basically re-underwriting them from scratch. Do you see that as going forward where servicing and originations might be two less kiosks and more of a galleria?
ISELEY: To participate in the opportunity to purchase MSRs, you need to have an origination shop to recapture the ability and economics in that model to drive the maximum results.
FOGARTY: What’s the trend in distressed assets? This is a market that’s obviously had many bad assets over the last five years, but a lot of the people that own them have been holding onto them because they don’t want to get rid of them at fire sale prices. We’re hearing now that the bid and ask disparities are getting much closer and there’s more business getting done. Is that what’s happening?
ISELEY: There’s more product in the market than what we’ve seen, which started in the second half of last year. And the trend’s continuing on that. We believe it’s a good trade for the consumer also because as Chuck said earlier, the best thing for everybody is to try to keep the customer in their property. For the HUD pools, public policy and private policy from a waterfall effect are probably the closest it’s ever been, which is a win-win for everybody.
FOGARTY: We’ve seen short sale go from practically an unknown commodity to a blazing meteor across the skies. Are short sales really less costly to do than REOs?
NEWCOMB: Definitely. We had started it early and tried to push it in 2007. It took a long time for people to come to realize that they really did save quite a bit of money from their foreclosure costs to short sales. Short sales could be a very short term element that happens because it drives the market now because a lot of homes are underwater. As that changes, there was a time where you’re not going to listen about short sales because you do have some protection in your collateral in the market value and foreclosures move better, loss mitigation would be something that holds into the element and not go away because it’s not tied to that value. It’s tied to fixing the customer. But I don’t know if short sales are a long turn run.
LUBURICH: Short sales are a significantly cheaper alternative to the REO process. Purely from a standpoint of seeing what goes into a rehabilitation, I’m trying to put that property into the turnkey condition that I’m trying to sell to. In the short sale space, because of the limited supply, you are typically going to move that property quicker. The person that is looking at it understands that the minute the decision is made, it can move. Whereas in REO, they understand that if they do put in an offer, there is probably a competitive scenario and may have to go back. We’re looking at 75% recovery versus 40% recovery for most of the clients we talk to.
FOGARTY: Most of the time, the short sales are priced very low to sell.
LUBURICH: Historically, we saw that they were priced low because they thought the customer was looking to make a move to get out pre-HAFA. HAFA comes in and sets the game for fair market value play, so now your customers who are looking to get out of the property understand that I don’t list it at full principal because that won’t occur, or I’m getting educating because we have more real estate agents and professional sales people that understand that process and understand the credentials and certifications and the process itself. So while there are some disparaging areas where you’ve got low prices, there are much better fair market value listings now than there were two years ago.
NEWCOMB: I’ll have to agree. It’s more that you don’t have to put so much in the property to sell it, but everything right now is selling competitively at the market value, whether it’s short sale or REO.
ELKINS: You had a good point when you mentioned that many of the Realtors are more educated now with what those things really are compared to what they were when this all started.
LUBURICH: Two years ago, anybody was a short sale expert because that was just another listing. Now it’s become something you specialize in.
ELKINS: That speaks volumes in how the industry has shifted to the customers, which has affected everything.
ROWLEY: Do you think there’s already enough investor appetite in the marketplace, such as the Phoenix marketplace?
ISELEY: We think some markets like Phoenix are heated. Large investor demand is not being satisfied. If there’s a fair price, you educate the customer. Lenders are more aggressive in trying to get a fair value on the market on that and they are flying off. So I don’t think it’s being satisfied.
FOGARTY: Do we risk about going right into another bubble?
ISELEY: In some markets, yes.
FOGARTY: Anybody in favor of that and think it’s a good thing?
NEWCOMB: Things self-correct. So when prices start to fall, people will fall off.
FOGARTY: The national average last year was 10% increase nationwide, which is a hefty bump. So I’ve been asking mortgage banking groups whether this is the start of a new bubble or the dead cat bounce where it falls so hard, it has to bounce up. They said that when you go down 40% and up 10%, that’s a normal reaction to an unnatural fall. I guess that’s the least problematic way of looking at it, but to me, it looks like a bubble.
