The Home Stretch

 

By John Alkire

With the housing crisis winding down, servicers are warming up for what could be a whole new ballgame in mortgage servicing.

I played a fair amount of baseball growing up, and I’ve found that I can apply quite a bit of what I learned on the ball field to other aspects of life, including business. For starters, any ballplayer worth his salt knows that performing well out on the field takes preparation and focus. You have to be ready for anything.

Things change all the time, and in the servicing business—just like in baseball—even the smallest tweaks can significantly affect the outcome of the game. Being able to predict what might happen before it actually does allows you to prepare your next move and react with agility, but it means paying close attention. Simply put, if you want to stay in the game, you have to keep your head in the game.

In mortgage servicing, things are always in some form of flux, requiring servicers and their partners to modify processes and challenging them to rethink how they can assist consumers and affect the market in meaningful ways. Based on how this market evolved and understanding that constant change keeps this industry moving forward, it’s important to pay close attention to what’s happening with lending and consumer trends, the economy, new regulations—basically anything that might have an impact on the way business is conducted. This is more than a game of chance, so be ready for whatever comes next.

Those in servicing have witnessed dramatic changes in recent years. Each time the market has shifted, they’ve adapted to meet the latest requirements of the lenders and consumers they serve—and the regulators and legislators who often demand those changes. As servicing becomes more complex, the market segments into different types of servicing operations based on companies’ specific strengths.

Together, the various players—from traditional servicers to subservicers, special servicers, and component servicers—make a pretty good team with the more traditional organizations calling upon the others to pinch hit as needed in their defined areas of expertise.

Focusing on Fundamentals

One of the latest trends seen in the market involves servicers returning to their core businesses with traditional lenders focusing on the efficient processing of performing loans and special servicers concentrating on curing defaults and assisting distressed borrowers. As regulation has becomes more complex and occurrences of short sales and loan modifications multiply, traditional servicers increasingly contracted out the management of their distressed portfolios.

This idea of servicers going back to their roots and focusing on their core competencies has elevated industry performance and directly benefitted borrowers, helping to ensure that loans—regardless of their status—are handled by those with the requisite expertise to provide whatever guidance and procedural execution is necessary.

Whether this bifurcation of the industry will continue as the housing market recovers is something to ponder, especially among special and component servicers. If at some point the number of defaults declines to a low enough level, we may begin to see traditional servicers absorb delinquent loans back into their portfolios.

Meanwhile, there are a number of other developments taking place that are already significantly reshaping the mortgage servicing landscape, from the increasing cost of doing business to the way new regulations continue to impact anyone and everyone in mortgage servicing.

Big-Ticket Servicing

The old adage “it takes money to make money” never felt more true than right now. It seems like the cost of doing business as a servicer just keeps going up. That’s especially true when working toward possible loan modifications for delinquent borrowers. The number of mandated tasks has skyrocketed and borrower notification and cure periods have been lengthened, resulting in notably extended processing timelines. And that trend doesn’t appear to be fading away anytime soon. In fact, processing timelines could very well be extended further.

Short sales, which are generally preferred over foreclosures, also require time and resources to manage. Last year’s directive from the Federal Housing Finance Agency calling for a uniform set of minimum response times among servicers led to some reduction in the time it takes to process a short sale, but those transactions can still drag on longer than the borrower, lender, and servicer would like.

Of more significant concern is the length of time it takes to complete a foreclosure. In the first quarter of 2013, the average time to foreclose in the United States rose to a record high of 477 days, according to RealtyTrac. In some states where foreclosures are processed through the judicial system, that timeline is even longer: 1,049 days in New York; 1,002 days in New Jersey; and 893 in Florida. For organizations tasked with servicing these problem mortgages, tying up company resources for that length of time has an obvious negative impact on profitability.

Playing by the Rules

Something else to consider is the effect of new regulations on the industry. The servicing guidelines issued as part of last year’s National Mortgage Settlement and the recently enacted California Homeowner Bill of Rights are examples of increased and more complex regulations with which the industry must now contend.

It’s understood that these rules, along with the National Servicing Standards put forth by our newest umpire, the Consumer Financial Protection Bureau (CFPB), are well-intended to protect everyone involved. However, achieving full compliance with these recent guidelines will come at a cost—perhaps one that not everyone is willing—or in some cases able—to bear.

At a minimum, ensuring compliance with the latest standards (and whatever new guidelines may follow) will require software updates, process revisions, further training, additional documentation, specialized staff, and various resources for auditing. Beyond that, contending with a large number of very specific rules on servicing will require organizations to be virtual experts in various narrowly defined areas.

That commitment alone may be enough to drive traditional servicers toward outsourcing certain elements of their businesses—though not without complication. Those electing to outsource will need to build in appropriate controls for their various vendors and audit third-party processes to ensure compliance with current guidelines. Equally important: They’ll need to be flexible enough to pull business from any vendor that fails to meet requirements without disrupting service to borrowers.

Adhering to the new CFPB regulations will likely be most challenging for traditional servicers. While the majority of special servicers already have the required practices in place to meet the latest guidelines, many traditional servicers have little-to-no experience working within this framework.

Complicating the issue further is the fact that some of the CFPB’s regulations have yet to be imposed on smaller servicing organizations. While these servicers may be exempt from the guidelines that govern the larger servicing shops, any organization thinking about doing work for the large servicers will need to make sure its policies and processes are CFPB-compliant. Traditional servicers will need to carefully weigh the potential negative impact of working with a smaller company not currently following the same rulebook.

These latest regulations complicate transfers of mortgage servicing rights as well, driving up both cost and risk. Though there are no new regulatory guidelines on how to conduct the transfer of servicing or to whom loans can be assigned, moving massive databases of borrower information from one organization to another presents a tremendous opportunity for things to go wrong. That window of chance—and the possibility of falling out of compliance—increases exponentially whenever large borrower-based pools change hands and servicing is parsed out to smaller subservicers or component servicers who may or may not have the experience, technology, and infrastructure needed to handle such enormous data requirements.

On the other hand, there’s a different regulatory initiative with the potential to have the opposite effect on outsourcing trends. BASEL III, the global regulatory standard intended to ensure banks are adequately capitalized, is expected to require lenders to keep capital on hand to offset any potential losses on loans they service.

With the Federal Reserve’s decision to apply these guidelines to all institutions with more than $50 billion in assets, many lenders may look to outsource the servicing of their loans in order to reduce the amount of capital they hold. Moreover, having the opportunity to “share” capital responsibility on a loan gives lenders a fairly compelling reason to sell off some of their mortgage servicing rights—they get an injection of capital from the servicer while sharing the financial risk with another party.

Right Players in the Right Roles

One area that warrants the attention of the entire industry is the CFPB’s contention that consumers ought to have more of a say in which company services their mortgage. This would be an enormous game changer for the servicing industry, making it necessary for servicers to consider incorporating consumer marketing efforts into their business plans. While it’s unlikely this transformation will happen in the near-term, the industry as a whole should watch closely and listen carefully, seeking to understand why the belief that consumers should choose their servicers become a trend and is gaining such momentum.

The very fact that consumers are worried about who specifically service their loans can only imply one thing: they are somehow dissatisfied with the way their loans are serviced. A recent CFPB report validates this theory—55 percent of the 90,000 complaints received by the CFPB were mortgage-related. Left unaddressed, this dissatisfaction could lead to even stricter, more costly, and more cumbersome regulation—making right now a good time for servicers to evaluate whether or not they’re bringing their A-game to every transaction.

It’s tough to say for certain what the future holds for the servicing industry and its various players. Just like in baseball, there’s always a bit of chance involved. But based on their performance in the distressed mortgage space, it’s clear special servicers are capable of going the distance—making them the ones to watch for many seasons to come.

There’s a good chance that when things settle down, the industry could end up resembling something of a two-tiered borrowing system with banks’ servicing operations focused on prime mortgages and loan originations that work well with their existing processes and non-bank lenders and special servicers working with borrowers who are unable to qualify for traditional loans.

By putting the right players in the right positions, everyone—borrowers, lenders, servicers, and investors—has the best chance at a winning outcome.

John Alkire became the first employee of Carrington Mortgage Services, LLC, in 2007. A veteran of the servicing industry, he was instrumental in directing Carrington’s entrance into the servicing business. Currently, he serves as the organization’s EVP.