At the annual SourceMedia Mortgage Servicing Conference in Dallas, attendees concerned about the future of their industry discussed at length the pros and cons of recent regulatory changes and still pending rules and requirements they may have to abide with in the near future. Loss mitigation timeframes, compliance costs, new customer protection rules and lack of specificity were among the issues of concern to industry experts Gagan Sharma, president and CEO, BSI Financial Services; Mike Wileman, president and CEO, Orion Financial Group; Alan Paylor, president, RMS Asset Management Group; and Steven Shiller of Wingspan who sat down with myself and Amilda Dymi, managing editor of Mortgage Servicing News.
Fogarty: To start, I was wondering, recently there was promulgated a series of 27 terms that states attorney generals would like servicers to abide by. What did you think of those terms?
Sharma: Having looked at it at a high level, a couple of things that jumped out at me that would be significant changes for the industry, I believe. One aspect was providing the borrower with a single point of contact throughout the process of loss mitigation. That, we believe, is something that actually talks more to what’s the model that we as special servicers have built in the market that there’s a recognition that that model does provide certain benefits to the borrower. We also believe that the aspect of having the servicer respond back to the borrower in a fixed amount of time is a net positive, and with a single point of contact, we feel that the timeframes can be managed to a reasonable degree if it’s done right. So I think those couple of things jumped out at me. The other aspect that was a bit of a concern was this aspect of banning dual-tracking of loss mitigation and pre-foreclosure. Our concern is that, if done right, it’s okay, but in some scenarios it may create bad behavior in some sense or creates—distorts the incentives that does it make it easier for somebody to game the system? So there needs to be some sort of a check and balance that, where the borrower has a legitimate need for the loss mitigation to be reviewed, the servicers are required to address those, but it shouldn’t be a way for the borrower to game the system and just cause a delay on the foreclosure process, if you would.
Fogarty: Anybody else? The terms are too hard or too easy or just right?
Wileman: And not talking specifically to any of the terms, but I did think it’s interesting where some of the initial attorneys general as I read that were in favor of promoting this settlement, and now when the settlement comes out, they’re against it because of some of the issues that it creates, possibly people that do game the system. As opposed to being able to work with the borrowers that really need the help, you’ve got someone who’s just—they’re going to get some kind of a break who they’re choosing just not to pay or trying to game the system. And I thought that was interesting where you see some of these AGs now going back and forth when the real terms are kind of put on the table for people to look at.
Fogarty: I think there were four state AGs that had second thoughts about it, but obviously most of them are still full speed ahead. I can remember when the Washington State AG investigated, I think it was Beneficial Finance, and came up with a $400 million settlement. That’s what happens when one state AG investigates you. What happens when all 50 do? We’ve heard numbers like the settlement’s going to be $20 billion. Do you think that’s the right range or…?
Sharma: Hard to know what’s the right number, but candidly it’s…
Fogarty: What have you been hearing?
Dymi: And also, beyond the point where all these requirements are right or wrong or just about right, how are they supposed to affect servicers, because servicers are also expected to change their systems, and the way they operate their systems, along with the need to make a lot of other expenses to get ready for everything that is expected of them. Do you think that this is going to kind of bring in more burdens to them, financial burdens, and high operational costs?
Paylor: We analyze it from a cost standpoint every single time. As a niche servicer, you have to be able to adapt to change very quickly, and I think even looking at the rules that were promulgated, is that these came from mega-servicers and stuff and we kind of look at them as supertankers. They’re so hard to move, so hard to change, and you have niche players who are able to adapt to that market, we think, a little quicker. And much like Wingspan as well, we have the ability to make that switch. As Gagan said, one of the key components would be that single point of contact is—that takes you—that will set you back a little bit trying to figure it out, but it is a good solution, assuming you can marry it to technology that you were indicating. Whether it’s an increase in cost, I think the jury’s out on that one. Most of the service providers that we have today are pretty up to speed on making those changes and helping us out. So we see that every time. And then if we have to outsource it, use labor-intensive changes, then we’ll do that.
Sharma: I think it gets—our estimate is there will be some increases in costs. Our special servicing model is—the high-touch model is typically more expensive than the traditional servicing model. If that has to be replicated on a larger scale to the larger servicers, it seems reasonable and plausible that there would be some increases in costs into the system.
Dymi: You mean manageable costs?
Sharma: That, we don’t know. That’s hard to handicap. It’s really what the mega-servicers do. Are they able to address those costs? We don’t know.
Paylor: I brought with me the MBA 2011 layout for what’s coming this year. When you determine the cost, almost all of us used to use the MBA survey for that, and it’s usually done by a select group of the mega-servicers and some mid-tier. But all of those now have been retooled to look at every cost structure that affects the different components of servicing, and when you read through that—and this year’s going to be expansive into the loss mitigation, default, and so we’ll read that as a means to adapt to any costs that we may be burdened with. But everything has changed from the old days, and I’ve been at it for 35 years, so the old days are gone and it is change, change, change and adapt to change.
Fogarty: We saw Elizabeth Warren, who is the head of the soon-to-go-live Consumer Financial Protection Bureau, tell Congress that her agency will regulate servicing and that she’s going to be a cop on the servicing beat. Do you think that kind of attention is warranted or is it overblown?
Wileman: I don’t know that it’s overblown, because I think most people agree that there’s got to be some fundamental changes in the servicing piece of it, the way borrowers are handled and all that. But I think it kind of goes to that—excuse me—where it’s becoming a paint-everybody-with-the-same-brush, to use an old cliché, because there are servicers out there, and especially the niche servicers, and in my opinion, that’s how the whole industry of the niche servicer kind of came about. People maybe recognized that there are certain borrowers they need to hand off to someone more specialized to do that and allow them to do it. So they had processes in place, and so why make other people—why make the people that had a good process or were improving their processes fall under and be judged because you had people out here that didn’t do a very good job, maybe refused to spend the money to adapt and get better? And so again, I don’t know that it’s overblown, but I think it’s overblown to the sense that you’re going to take an entire industry and kind of force them into this box, it seems like, and I think that’s the thing that could cause problems or even delay problems with getting some reform in the servicing industry. I look at, like, the services that we provide, our business has increased because people have recognized there are certain competencies that they want to spend their resources on and there are certain things that they want to have someone who specializes in that do that, in the area of assignments, retrieval, research and things like that. So I don’t know, we’ll just see how that plays out and what the rules are and how they govern.
Fogarty: Would it be fair to say that compliance is the number one issue for servicing companies today?
Sharma: Absolutely. What I would say on the compliance side is compliance—it would be good to have a set of rules that are relatively consistent rather than a hodgepodge of rules that there may be some overlap, with a fair degree of change. I think most people want to do the right thing, and the guys who don’t want to do the right thing, we want them out of the industry as quick as we can. But for the people who are focused on trying to do the right thing, the regulatory system should be set up in a way that it allows us to comply with the rules and the regulations as they are. It shouldn’t be—if the process becomes too difficult, then we don’t want to be penalized over footfalls, if you would. We try to do the right thing. Give us a reasonable set of rules that are then relatively consistent so that we can work with them. Constant change from multiple bodies makes it a little bit harder to stay on top of them. So what we’d ask is, if there needs to be a consistent set of rules, we’ll work with that, but let’s make it consistent, and then give us some time as an industry to adapt to those.
Dymi: Well, what seems to be the norm these days is that the regulators change the rules all the time so nobody knows for sure whether the initial proposal, or the initial plan is going to stick the way it was perceived in the beginning. One of the things that is bothering many people, judging from what I hear, is that they are troubled by the fact that the process is long and they don’t know the difference or can’t keep track of what was required at the beginning of this process and what in the end. It tends to be a very different, I mean the beginning and the end, and that is another challenge. Right?
Sharma: Absolutely…
Dymi: So is there a way for servicers to have a louder voice, if you will, when it comes to speeding up the adjustment process or the shaping up of these rules until they reach a consensus or a better medium with the federal government, the agencies or other regulators?
Sharma: My personal view is that, as servicers, we can give feedback to the regulators, but it’s really the regulators and the public policymakers who are really making the regulations and the rules, and so we really have to work with the rules as they’re laid out. Just like with this AG settlement, maybe some of the larger servicers are more deeply engaged with them, but as a smaller player, we don’t really have as much of a say in the process. The rules are what they are, and then we in some sense react to those.
Dymi: You have to be the foot soldiers here.
Sharma: In some sense, yeah. And we don’t have a way to influence the direction in which the war is going to be fought.
Shiller: I agree. I think consistency is very important, specifically to borrowers. They’re looking for that. We see the loans transferred across so many different servicers at times with secondary market sales, and I think that’s important. I also think it’s important to define—how we define certain things. Everybody has a different definition of what a delinquency means, everybody has a different definition of a right party contact, so when you start getting into compliance, how is the government measuring it? What are they measuring it by?
Dymi: Right.
Shiller: What does a single point of contact really mean? Does it mean one person, one company, a group of people? So I think that having those definitions defined and consistency across the board.
