Changing the Playing Field for Loan Servicing, Loss Mitigation and Default Administration

Transcription

1 Background The loan servicing business is undergoing major scrutiny with operating, profitability including a run-away cost to service and regulatory compliance pressures. With the Dodd Frank legislation, the recent uncovering of foreclosure documentation problems, a period of time where the most loans ever in default has occurred and where the overall loss mitigation process is ill equipped to deal with all of this, its time to change the playing field, possibly forever. Unfortunately the silo structures and processes that many servicers have, contribute to many of the issues being faced today. Poor communications across servicing teams, data accuracy issues, aging loan servicing systems and loss mitigation processes that require heavy staffing with no economies of scale are all issues contributing to the run away costs. Meanwhile, the effectiveness of loss mitigation efforts is proving to be less than acceptable. A fundamental concept embedded in this change the playing field effort is that a box car approach, where all loans are treated the same, especially during delinquency, has never really worked and definitely does not work in the current credit downturn. Changing the Operating Processes Most loan servicing operations are structured by functional skills and not by process or risk attribute. With the credit and regulatory challenges faced by most servicers, as well as, the negative characterization of loan servicers by most consumer groups, it s likely the final bell for the loan servicing platform of the past. There are financial factors that may also cause a redesign of the traditional servicing platform. Run away servicing costs and current servicing compensation arrangements that do not deal effectively with default servicing activities are a big issue. The GSE proposals for changing servicing fee structures will likely force loan servicers to replatform or even depart from the business. All of the proposals will have a negative impact on mortgage servicing rights (MSRs) recorded on a servicer s balance sheet. Several issues that investors, servicers and regulators need to consider when recasting servicing compensation include: Servicing compensation that is basis point driven contemplates that the servicer was part of the loan origination process and should have a stake in the loan Helping you climb to success 1

2 result. Given that many originators transfer servicing the ultimate servicer does not have any accountability to the underwriting of the loan. Many servicers are in a fee for service business and will execute loan services that they are compensated for. The historical concept of not paying fees while a loan is in default is flawed for a servicing business (no servicing fees and usually no upside for performance). A fee for services concept would definitely incent loan servicers to execute critical steps that may be time consuming, costly and/or require more experienced/expensive loan counselors. Fees that are lower than cost (some of the proposed fee arrangements) will cause the accountants to require a loss on such an executory contract to be recorded. This issue will bring about a renewed interest in identifying the fully loaded cost (not marginal cost as often used in MSR calculations) of loan servicing. MSR valuations will decline significantly under most of the proposals. Along with the Basel III implications of caps on MSRs counting towards capital for banks, these changes in the financial aspects of loan servicing will cause major changes in who and how mortgage servicing is handled. Notwithstanding the changes noted above, loan servicers will need to do certain things better and differently than they have in the past. Improvements must include being able to seamlessly determine the borrower s up to the minute financial status, having all servicing personnel involved with that borrower communicating and on the same page and being able to make timely decisions as to the best approach to keep the borrower making payments. The current servicing platforms are ill prepared to be able to know/receive on-going borrower financial information, credit status and collateral value. Unlike the past where such data was generally not updated after the loan origination date unless a collection problem occurred ongoing credit analysis of the borrower and the collateral will be critical to effectively reduce loan losses, identify proactively which borrowers are at risk and have a workable plan for loss mitigation. Data and systems are available to execute this ongoing credit/collateral analysis but the loan servicers have not adopted this policy/process. Could it be that the current servicing compensation mechanisms actually work against servicers making the necessary technology investments? Changing the cost model is also a critical element. The servicing business does demonstrate that there are economies of scale, however, too many people, processes and Helping you climb to success 2

3 aged technology cost the servicer too much. New disclosure requirements, especially for securitized pools of loans, will cause costs to increase. Any spikes in delinquency clearly have cost servicers significantly. So the pressures on loan servicing costs are going to continue to push such up unless some fundamental changes are made. It s clear that today s loan servicing platform will have to be realigned. The mortgagor/customer activities will be performed by a cradle to grave team that meets all of the mortgagor s needs whether collecting payments, providing tax payment data, or helping restructure the financial balance sheet of the mortgagor. This realignment will create a single point of contact between the servicer and the borrower. Practically, this might not be a one to one person relationship but a relationship between the borrower and a team of experts all informed about the borrower s status. So instead of servicing personnel affecting an individual mortgagor being in different departmental lines they are likely to be in customer-centric teams. Such teams will handle every aspect of the customer s mortgage normal activity and default, collection and modification/work out activities. Hence all customer facing personnel will perform processes that are part of a continuous credit cycle that involves really knowing your customer. Better transparency in customer facing systems showing clear status of the relationship payments received, actions being taken by the servicer, pending modification or foreclosure activity, etc should all be clearly displayed via the web, call in lines, etc. New opportunities afforded by this structure include having originators on the customer centric team that can monitor the customer s modification, refi, new mortgage and other lending needs the concept of a borrower for life begins to become reality. Investor reporting may be an independent team that provides information to the investor and compliance oversight to assure the investor s interests are being managed. Cash processing in most banks is done centrally anyway. As most loan servicers are now owned by banks a separate cash processing units in the servicing area is no longer cost effective. Hilltop Advisors has conducted many servicing ass6essment and redesign engagements and have identified a number of reasons why servicing operating costs are out of control. The following reasons impact most servicers: Helping you climb to success 3

4 using a box car default servicing methodology where every at risk loan is treated the same will cause collection and work out costs to be higher than necessary, Pooling & Servicing Agreements that are not consistent relating to servicing requirements default, trigger events, reporting, etc, customer service processes do not include specialists, too many handoffs in the customer process to impact cost and time loss, too many cash accounts for investors, NPV calculations not being computed correctly or results not being used in making timely loss mitigation decisions, run away process costs not identified separate from ongoing costs, outsourcing vendor assessments not being completed to assess performance or service level agreement compliance, technology is not being fully utilized or add ons are not installed, foreclosure claims are not well documented, no follow up is completed on denied or partially denied claims, etc., the longer the timeline the higher the costs go and the number of costly errors made increase (foreclosure, short sale decisions, REO marketing decisions, etc), repurchase claims and/or MI rescission issues are not being resolved properly. Changing the design of the basic loan servicing processes should focus on increasing accountability, break down of traditional silos, enhancing QA/compliance efforts and addressing run away costs. Depending on the nature of the loan servicing operation (structure, number of locations, departmental operating format, technology applications, etc), there are often many other findings that can be identified based on our experience. This redesign effort is not simply streamlining or automating processes, nor is it a shift in personnel alignment this change in the loan servicing, loss mitigation and default administration platform is a major change in the way loan servicers have historically approached their business. Based on our loan servicing experience, this operational platform change will not be easy for most loan servicers. Such a change process will require an informed look into the type of servicing business, the loan servicing portfolio, assessing the management team, operating processes, costs, regulatory compliance, data usage/accuracy, and the usage/deployment of technology applications. Helping you climb to success 4

5 A change in the loan servicing playing field requires defining customer differently. Historically, servicers either viewed the borrower or the investor as their customer. The future definition needs to be multi-faceted, since there has always really been a multitude of customers i.e. the borrower, the investor, the security holder, the master servicer, trustee, regulators, etc. Teams will need to be formed around the new definition of customer. Correspondingly, servicing functions will need to be realigned to meet the needs of all these customers. Further, the customer definition will likely be impacted by the stronger requirements for quality assurance and regulatory controls. Customer accountability will also be important to establish i.e. who will ultimately answer to the customer from within the servicing organization. It is clear that we have arrived at a point where regulatory oversight of the loan servicing business will increase significantly, where servicing standards will be set by regulators and not investors, and where borrowers will have the maximum amount of protection. The servicing playing field has changed, likely forever, and servicing management needs to make the people, process, and technology changes that are demanded by this new/more visible loan servicing environment. Authored by Geoffrey A Oliver, CPA, Certified Mortgage Banker, CEO of Hilltop Advisors, LLC (a Financial Services consulting and accounting advisory firm). He may be reached at gaoliver@hilltopadvisors.com and website is Helping you climb to success 5