REQUIRED READING: The English poet Lord Byron once observed, ‘The busy have no time for tears.’ Indeed, there are few tears being shed by today's subservicers – and the volume of work being handled is bringing a rather jovial response from some executives within this sector.
‘We've been around for 30 years, and every quarter has been a record quarter for us,’ says Gordon Albrecht, executive vice president and chief strategy officer at FCI Lender Services Inc., based in Anaheim Hills, Calif.Â
But that does not mean that subservicing is without its share of teeth-grinding challenges. Robert Shiller, senior vice president of enhanced servicing solutions and loan resolution at Carrollton, Texas-based Wingspan Portfolio Advisors, points out that the subservicing sector is still cleaning away the continuing reverberations from the 2008 economic crash.
‘Last year was very interesting,’ he says. ‘We were still dealing with a lot of nonperforming loans. As a result of robo-signing, there has been an increased surveillance and granular review of almost every single loan file. This has resulted in our getting more involved with bigger firms as we go through file after file after file.’
Dave Vida, chief strategy officer and executive vice president of loan servicing at Glendale, Colo.-based LenderLive Network, says last year's stagnant housing market added to subservicers' burdens.
‘The nonperforming loan sector has not moved as it should have,’ he says. ‘The movement we thought would happen in 2011 did not happen.’
Nonetheless, opportunities for subservicers have evolved in the face of market difficulties.
‘We're seeing a lot of growth in the specialty servicing arena, especially with seriously delinquent loans,’ says Kevin Stitt, president of Gateway Mortgage Group, based in Tulsa, Okla. ‘The amount of delinquencies, especially in the Federal Housing Administration (FHA) space, is starting to tax the servicers. FHA originations exploded over the last two years, but there are not a lot of experts on FHA loss mitigation.’
Even niche markets have provided lucrative opportunities for subservicers.
‘We've transitioned to exclusively reverse mortgage subservicing,’ says John LaRose, CEO of Lansing, Mich.-based Celink. ‘The biggest change on the reverse mortgage side has been the incredible amount of tax insurance default situations. The subservicers in this space have not dealt with the loan modification issues that the forward side has been pummeled with.’
Potholes in the road
However, subservicers are also facing their own challenges, most notably from continually shifting regulatory requirements.
‘Every acronym regulatory agency has suggested changes in servicing standards,’ says Gene Ross, president of Virginia Beach, Va.-based LoanCare Servicing Center, adding that the industry is still in the dark on the final nature of these proposed changes or when they will take effect. ‘It has been very, very difficult to manage a business without knowing the outcome. The rules of engagement have changed, and we have no real playbook going into 2012.’
Ross notes that as a result of regulatory upheaval, his company needs to realign its workforce.
‘We've been adding more people on the compliance side,’ he continues. ‘Operationally, this has been causing us to spend more time on processes and procedures.’
David Miner, executive vice president at Sudbury, Mass.-based Graystone Solutions, notes that the government-sponsored enterprises (GSEs) are placing heavier compliance burdens on the industry.
‘Subservicers are trying to meet the ever-increasing demands of the GSEs on the default side,’ he says. ‘They are putting a lot of pressure on us and our clients.’
Gagan Sharma, president and CEO of BSI Financial in Irving, Texas, adds that state regulatory requirements are also keeping subservicers on edge.
‘The state regulatory environment is evolving,’ he says. ‘This has not stopped, because robo-signing has not fully flushed out. We've not seen the last of that.’
Adding to the confusion is the Dodd-Frank Act, which is still a far distance from being fully implemented.
‘People are waiting on what its impact will be,’ says Brad Durrer, mortgage operations manager at Wipro Gallagher Solutions Inc., headquartered in Franklin, Tenn. ‘Compliance departments are watching that closely to see how it will impact bottom lines.’
Scott Conradson, president of Tampa, Fla.-based Quantum Servicing, adds that one contentious element of the Dodd-Frank Act is creating tumult.
‘The Consumer Financial Protection Bureau is definitely a wild card,’ he says. ‘Who knows what kind of difference that will make?’
Conradson is also concerned about the effects of certain legal trends that result in dragging out the foreclosure process.
‘With foreclosure timelines, there are certain key states – like Florida and New York – where we've seen a dramatic elongation,’ he says. ‘We've also seen other developments on the litigation side that are driven by borrowers who are a little more attuned to their ability to monkey with the process.’
Conradson adds that this situation has been fueled by a growing number of attorneys aggressively advertising their services to delinquent borrowers who have the patience and funds for a drawn-out court fight. Sharma concurs by noting that the lack of a resolution to the foreclosure crisis has generated more angst for the industry.
‘Every [industry] report talks about the number of days that delinquent loans stay in the pipeline before they get foreclosed on,’ he states. ‘But that number is not smaller. This creates a major concern and increases the uncertainty in the overall market.’
So where is the subservicing sector heading in the coming months? The good news is that the near future will closely resemble the past year in terms of activity and opportunity.
‘We anticipate significant growth in 2012,’ says Albrecht. ‘There are private-money lenders servicing their own loans who no longer want to touch that with a 10-foot pole. Their overhead for staffing, licensing and legal end is pretty scary. If I were a lender, I'd be afraid of the servicing side.’
However, the near future will also continue the climate of 2011 by giving subservicers reasons for concern. Ross is particularly worried about a discussion paper issued by the Federal Housing Finance Authority (FHFA) that sought to find an alternative mortgage servicing compensation plan for the industry.
‘2012 is very much a work in progress,’ he says. ‘I'm hoping that as we get further into 2012, the FHFA goals will become more clear and things will start to calm down.’
For the most part, today's subservicers do not anticipate a new influx of competition.
‘I am not sure the sector will grow dramatically,’ says Miner. ‘Some companies have gotten on the default side, but it is a costly process to start up – you need the systems and know-how to tie them in effectively to a number of vendor sources.’
LaRose argues that the absence of new competition will result in more work for existing subservicers – and the strain of still-high workloads will need to be addressed.
‘We've invested a lot of money in IT infrastructure to help provide efficiencies,’ he says. ‘We just can't keep adding people to handle this kind of volume.’
However, Shiller believes that the near future will see more activity from new players.
‘We're going to see more specialty servicing get in the mix, especially in the foreclosure process,’ he predicts. ‘Banks have to move off their nonperforming assets.’
Albrecht agrees. ‘Even lenders servicing their own performing loans will outsource nonperforming loans to the specialty servicers,’ he says.