PERSON OF THE WEEK: Ed Fay is founder and CEO of Fay Servicing, a special servicer and mortgage originator founded in the midst of the housing crisis in early 2008. MortgageOrb recently interviewed Fay to learn more about why the company recently expanded into mortgage origination and real estate owned (REO) servicing, as well as how servicers can address the increased risk of servicing non-qualified mortgage (non-QM) loans.
Q: What was the approach you took to establishing a servicing platform in the wake of the housing crisis?
Fay: The most fundamentally different approach to servicing that we took when we established the firm was driven by our belief that in most cases, we could maximize execution for both our clients and the borrowers if we could avoid foreclosures. This was in contrast to our competition that focused on getting the title of the property as quickly as possible. And because traditional servicing operations were built for 1% delinquencies, they simply were not designed or equipped to effectively manage the more than 7% delinquencies they were experiencing.
We, on the other hand, had the benefit of being able to engineer our firm to handle the greatest challenges facing the servicing industry. More specifically, we recognized that in the post-2007 environment, if a servicer could build a strong relationship with a troubled borrower and get him to re-perform (and keep paying), the economics to the note owner could vastly exceed that of a foreclosure liquidation – no matter how quickly it was executed.
So, we placed great value on hiring the kinds of employees who could execute this strategy. Their mortgage intelligence and interpersonal skills would build these relationships and ultimately achieve the results we were striving for.Â Â
It was also very clear we had to go beyond a simple single point of contact (SPOC) approach and develop a ‘case ownership’ style for servicing to maximize results. This means we apply a more end-to-end approach in which the borrower is treated as a case that must be resolved rather than just another isolated task item when it comes up in a queue. This aspect increases accountability, which is something our people enjoy and thrive on, particularly when they see the positive effect their efforts have on their borrowers' lives. But again, it required a very different kind of staff to execute this kind of relationship-based servicing approach.Â Â
Q: Fay Servicing recently launched a mortgage origination division. How did you come to the decision to establish this division, and how did your experience as a special servicer play into that?
Fay: Servicing and originations are clearly two highly complementary business lines, and one can feed the other. For us, it just made a lot of sense to do it now for a few reasons. First, it enhanced offerings that we can provide to our servicing clients because a special servicer and originator under one roof with sound alignment of interests can have much higher pull-through on various niche refinance strategies that help investors maximize returns. Second, we believe that as the credit box widens over the next few years, new origination strategies will benefit from a tighter link to corresponding servicing strategies and we will be able to provide a more integrated platform for our partners. The obvious cost savings on compliance, IT systems and other barriers to entry are nice bonuses.Â
Another meaningful factor is that many of our senior managers come from a consumer finance or origination background. So we have always had a very strong ‘credit culture’ for a special servicer. This natural extension of our business had been considered as a possibility from the beginning, as it leverages those core strengths at a time when other originators have grown reliant on prime refinance business in a low rate environment where volumes have slowed down dramatically.Â Â Â
Q: As non-QM lending continues to ramp up, how can servicers prepare themselves to mitigate the new risks and deal with the heightened scrutiny that come with servicing these loans?
Fay: There are still many unknowns involved with the foray into servicing non-QM loans and how one can be successful doing so. Because there are higher risks associated with foreclosure or litigation with these types of loans, it is essential for servicers to execute strategies that avoid these costly outcomes. Luckily, the market conditions over the past six or seven years have forced many servicers to develop innovative processes that will serve them well moving forward.Â
One powerful approach servicers should continue to focus on is building strong and lasting borrower relationships with the most skilled and experienced employees, such as former mortgage originators and non-prime originators, who possess the skills needed to connect with borrowers, establish rapport and keep borrowers engaged so they do not view foreclosure and litigation as an attractive option.
Servicers should also employ appropriate technology to deal with concerns of ability-to-repay (ATR) validations. We are seeing some novel strategies taken by lenders to prove ATR and the servicer should be equipped to support those efforts, which may require equally novel approaches.Â
Lastly, given the importance of securitization within the non-QM sector, a non-QM servicer should be in good standing with the Consumer Financial Protection Bureau and state regulators, as well as institutional investors, rating agencies, investment banks and law firms. We believe these techniques will add great value to their origination partners' non-QM initiatives and help establish this emerging category in a responsible manner.Â Â
Q: Continuing to advance Fay Servicing's service offerings, you recently launched an REO division. How did you come to the decision to do this?
Fay: We did not originally think that running an REO company would be critical to our servicing operation, but quite simply, we saw an opportunity to provide enhanced value to our servicing clients, and we jumped on it. Having more control and options as far as potential rehabs and other marketing and liquidation strategies has been a nice ‘bolt on’ to the platform as we seek to optimize returns for investors. We are very excited about adding Glenn Brooks to our management team, and his expertise was a key factor in opening up the division.