It’s a good time to be a special servicer.
Driven by concerns about the cost and risk in managing delinquent mortgages, primary servicers today are more and more outsourcing this work to special servicers, the high-touch specialists who essentially focus on nonperforming pools of loans.
And this trend is gaining momentum. The need for special servicers is not going away any time soon despite the improving health of housing markets.
Plenty of nonperforming and underperforming loans still abound, with borrowers seeking the chance for loan modifications. This trend has grown in recent months and is expected to continue growing over the next few years.
As the trend grows, the importance of a thorough due diligence process cannot be stressed enough. Completing the due diligence for a successful and smooth transfer of mortgages from the primary servicer to the special servicer is critical to the entire operation.
Special servicing is based on a unique fee-based business model, which often includes performance incentives for special servicers and their employees.
Special servicers do not face the burden, as do most primary servicers, of having to raise large amounts of capital that are required for funding MSR acquisition and advancing obligations.
Technology that ensures compliance and the creation of a scalable enterprise are prerequisites to being successful in the space. However, these attributes do not remove certain barriers to entry.
The special servicer in essence must work with the previous actions taken by the primary servicer when a delinquent loan is transferred.
While perhaps not legally responsible nor at monetary risk for any errors caused by the primary servicer when dealing with a delinquent borrower, the special servicer taking on the servicing task needs to be cognizant of previous account activities for a number of reasons:
- Accuracy in establishing staffing models
- Creation of cost projections
- Identification and correction of posting errors
- Single point of contact compliance
- Loan transfer procedure compliance
- Existence of loss mitigation remedies
- Confirmation of lien enforceability
- Borrower disclosures are timely and accurate
When taking over the servicing responsibility, the special servicer needs to create customized loan-level due diligence around certain loan pool characteristics. The due diligence provides for transparency and documentation of the loan’s servicing lifecycle and facilitates the account planning that optimizes special servicing tasks. It establishes the baseline for servicing quality control programs for the entire operation.
It also creates a value added component to the primary servicer that has transferred the loan and the owner of the mortgage, and differentiates the special servicer in a very competitive business environment.
The utilization of a special servicer makes sense in today’s mortgage servicing business and represents the kind of process re-engineering the industry is being called on to perform. The standard of care required in transferring delinquent loans, while also ensuring the proper level of borrower care, is of paramount importance in rebuilding trust and confidence in the servicing business.
Bill Garland is executive vice president, strategic relationships and development, for Decision Ready, a technology provider based in Irvine, CA. A mortgage industry veteran with over 30 years of experience, Garland is an expert in managing and developing mortgage servicing operations, and has managed technology-related outsourcing opportunities for many years.