When mortgage rates moved up sharply this past fall, immediately following the presidential election, there was a corresponding uptick in foreclosures. Since then, mortgage rates have fallen somewhat, but they are expected to increase again, mainly because the Fed is expected raise rates at least two more times this year. Should rates rise as forecast, it’s likely that mortgage servicers will, once again, begin to see foreclosures increase.
So, considering all of the new processes and technology solutions that have been developed for mortgage servicers since the Great Recession, what strategies should they be employing today in order to mitigate risk and help borrowers stay in their homes? To find out, MortgageOrb recently interviewed Gagan Sharma, president and CEO of Irving, Texas-based BSI Financial Services, a national mortgage subservicer and provider of servicing technology.
Q: It seems likely that mortgage rates will begin to increase again, so what strategies should mortgage servicers be employing in order to keep distressed borrowers out of foreclosure?
Sharma: First, I don’t think the recent uptick in foreclosures was due to payment shock. Our sense is there may be some impact due to borrowers’ modification rates adjusting higher, but this is still not that significant.
From a servicer perspective, the most important strategy to mitigating risk is to reach out to the borrower as early as possible. This involves using information about borrowers to do predictive work that identifies “at risk” borrowers, establishing contact early in the process to determine the borrowers’ situation, and offering them options to work out a plan.
If the borrower reaches out first, servicers need to be able to quickly connect him or her with the loss mitigation team to see what can be done for that specific borrower’s financial scenario.
Q: Any time new regulations are introduced, there are compliance and cost concerns. How do new regulations typically affect costs for special servicers, and how can they mitigate those compliance costs?
Sharma: It’s hard to quantify precisely how much costs have gone up, but they have definitely increased.
There are generally three ways that costs increase. First, servicers must be on the lookout for upcoming regulations and prepare for them, and there is a cost associated with creating this type of infrastructure. Second, there is the cost of implementing necessary changes in order to be compliant – whether it is creating additional processes, investing in technology, hiring people or any combination of these strategies. Third, there is the cost of adjusting to the new regulations. When new changes are rolled out, there is typically a transition period during which errors can increase.
The best approach to controlling these costs is to re-engineer core processes, boost staff training and invest in new technology, with an eye toward automation. Over time, we’ve learned that simply hiring an army of people is not the most efficient approach. It takes careful, intelligent use of technology to lower compliance costs.
Q: As compliance is an ongoing focus with servicing, how does BSI Financial reduce risk and adapt to new regulations?
Sharma: We think the servicing industry needs to change its operating model. Under the current paradigm, whenever a new requirement comes out, servicers throw more resources at it by hiring large numbers of people. We believe a better approach is automating core processes so that everything runs through a manufacturing-type environment, in addition to creating a near-real-time exception identification processes.
BSI’s Asset360, an analytics platform and data warehouse, is a good example of this. Essentially, we take a daily snapshot of our portfolio, with over 10,000 fields of data that we are importing into the platform. Then, we run hundreds of reports daily through a proprietary exception reporting engine that we developed based on institutional knowledge and input from auditors, rating agencies, and our clients. By doing this, we make sure we focus on loans for which there are exceptions, as there’s no reason for someone on the operations team to work on a loan for which everything is perfect. We’re also able to catch issues much earlier in the process, before they have a chance to escalate. At the end of the day, Asset360 enables us to stay compliant and handle things with speed and accuracy while helping us avoid any impact on borrowers.
Q: Transparency is very important across the industry. So, what is the best method to work with investors to maintain transparency, accomplish objectives and meet the goals for the servicer and investor alike?
Sharma: Investors want transparency in their portfolio performance, and this comes with data and technology, which we’ve built into our platform. However, most servicers could be doing a much better job at providing investors with greater transparency. Delivering data to the investor 15 days after the close of every month, which is typical of most servicers, may not be soon enough, going forward.
Investors want data at a much higher frequency – if not daily, then weekly, or at least twice a month. It’s critical to give investors access to data so they can make better decisions on the loans and so they have better visibility into what they own. Because of this, technology will play an increasingly important role in how servicers deliver transparency to investors, as well as in ensuring they meet the requirements and goals of each investor.
Q: Mortgage servicers and special servicers have an enormous amount of information available to them. How can servicers use this data to their advantage, and what are some techniques to incorporate data to enhance working with both investors and borrowers?
Sharma: For servicers, data is key to making better and faster decisions. When servicers use exception-based processes, exceptions can be identified earlier, before the investor or borrower has a chance to see them. This leads to fewer exceptions, fewer complaints and a higher-quality experience for everyone involved in the transaction.
Another way to use data is through predictive analytics to create better forecasting capabilities. If servicers know where an exception is likely going to occur, they can identify and address it before it becomes an issue. Similarly, if they know what borrowers will likely want, they are better able to provide that information when borrowers want it, in the format they want and via the medium they want – whether it’s mobile, Web or through a call center.
Q: Lastly, why are some large banks, such as Citigroup, exiting the mortgage servicing space, and do you think this trend will continue?
Sharma: Large banks are exiting the market for a combination of reasons. First, Basel III regulations make holding mortgage servicing rights less attractive. For business reasons, some banks are choosing to focus on offering mortgages to customers with whom they already have a relationship. Increased regulatory costs are another reason why banks are reconsidering the mortgage servicing business.
Although large banks will still be involved in servicing, I believe this trend will continue, which creates opportunities for non-banks to step in and create new, better ways of servicing customers that keep costs under control. To be profitable, they will need to determine the right use of technology to make better decisions faster, increase efficiency and improve compliance.