REQUIRED READING: For Capacity Building, Servicers Follow Lenders’ Lead

Written by John Clapp
on June 10, 2009 No Comments
Categories : Required Reading

In late March, the Mortgage Bankers Association (MBA) revised its[/i][/b] forecast for 2009 originations, projecting new loans would total some $2.78 trillion. If the market expectations pan out the way the MBA sees it, 2009 would place behind only 2002, 2003 and 2005 in terms of annual origination volume. That high watermark – $2.78 trillion – is based almost entirely on refinance activity, spurred by falling interest rates that were precipitated by the Federal Reserve's decision to up its purchase of Treasury bonds and mortgage-backed securities. In fact, in announcing its new forecast, the MBA mentioned that it was also lowering its projections for originations tied to home purchases. The group's chief economist, Jay Brinkmann, went on to outline four specific difficulties that the refinance rush will cause to the mortgage banking industry. Independent mortgage bankers will likely be hamstrung by the all but dried-up warehouse lines of credit, the retail channel of loan officers will struggle due to the shrunken number of brokers doing business today, appraisal- and document-related processes will be slowed by increased scrutiny (the result of mortgage fraud prevalence) and servicers will face a "massive churn in their portfolios as old loans are paid off and new loans [are] booked." The last talking point – portfolio churn – comes at a time when servicing operations are inundated with defaults and foreclosures. While the Fed's actions have caused interest rates to drop, to the relief of the nation as a whole, they have also added to the workload for an already overburdened industry segment. This equation, in turn, equals one thing for servicers: a need to increase capacity. The challenge is not new, but it is considerably enlarged. [b][i]The response[/i][/b] The megaservicers have responded in typical fashion by bringing on waves of new employees. GMAC, Bank of America and Wells Fargo have each announced hiring initiatives that will result in thousands of new staffers in origination and servicing. Subprime giant Ocwen has grown its home retention consulting staff by more than 65% since the third quarter of 2007. Wilbur Ross' American Home Mortgage Servicing Inc. (AHMSI) added almost 600 associates between October 2008 and March, and the upcoming move of its corporate headquarters will result in more hires. The bulk of the additions have been in the call center and loss mitigation functions, according to Norton Wells, chief operating officer. Customer service grew by 79% to 538 employees, and loss mitigation/default management (which includes borrower outreach) grew 65% to 281 employees. "This number of associates, in conjunction with an outsourcing relationship we have with a specialized modification vendor, will provide sufficient staffing to handle our current volume of work," Wells says. The company held job fairs late last year, with the goal of having new staff members hired and trained by mid-February, before the boarding of new loans. Training cycles generally run about three to four weeks long, although Wells notes that new hires' job and systems experience comes into play. Associates who are familiar with the LPS servicing platform that AHMSI uses can be fast-tracked and placed into more specific systems training courses. But other than system familiarity, what qualifications do servicers want in loss mitigators? A prevailing trend appears to be the redeployment of professionals from the origination side of business into servicing operations. As the government maintains its focus on loan modifications, the job descriptions for various servicing positions are beginning to resemble those for roles in origination. "I think in today's environment, the best skills for loss mitigators are people who have front-end experience," noted Gene Ross, president of LoanCare Servicing Center, during a recent industry conference. "Mortgage underwriters – people on the package and delivery side [who are] familiar with the documents – make excellent loss mitigators." Servicing shops are increasingly being steered away from recasting arrears during the loan mod process, as it usually results in higher monthly payments for borrowers and, in turn, unsatisfactory recidivism rates. Instead, servicers are expected to view loan modifications as essentially new loans, causing a need for income verification, net present value modeling and the ever-important ability to empathize with borrowers. "When dealing with delinquent borrowers who you're helping with modifications and refinances, the first thing you need to do is position yourself as a trusted advisor to the client, give the client confidence that you're able to help them, lay out financial solutions for them that can help them recover from the financial struggles they're having, and give them peace of mind in the financial transaction that you might be helping them with," notes Scott Stern, CEO of Lenders One, a collaborative of independent mortgage bankers. "Those skills are more traditionally associated with those undertaken by loan officers than people in servicing management." Before jumping into the vendor community as head of First American's Outsourcing and Technology Solutions line, Jim Miller served as a senior default executive with both J.P. Morgan Chase and Citi. He recalls an instance at one of his former companies where a specialty servicer contracted by the company, despite political pressure, failed to fully re-underwrite loans. His solution was simple. "I went out and hired all FHA-certified underwriters to re-underwrite the debt, because some of that also entailed principal reductions," Miller says. "I absolutely believe it's a different skill set [than it was before] to do modifications right." The surge in refinancing has also reversed lenders' 2008 staff reduction trends, Stern adds. Servicing executives who want personnel with underwriting experience will have to compete with lenders, and the candidate pool may become slimmer as a result. Nonetheless, the mortgage industry is still experiencing a net job loss, and servicing operations may have access to high-quality talent that was previously hard to find. [b][i]Rules reconfigured[/i][/b] Servicers are taking a cue from their origination counterparts elsewhere, too. Just as human resources with underwriting knowledge have taken up shop in servicing, so have technology solutions. Numerous companies have tweaked their loan origination software (LOS), which have "decisioning" capabilities useful for loan modifications, and begun marketing directly to servicers of all stripes – master, sub- and specialty servicers. Overture Technologies, with roots in student lending, entered the mortgage business in 2003 and servicing, in particular, last year. The company leveraged the data interfaces and decisioning engine of its origination technology and coupled it with the secure, Web-enabled capability found in its higher-education system to create its Mozart for Special Servicing product. Having much of the framework in place in its origination software allowed Overture to make a quick launch into servicing, says Linda Simmons, general manager of the company's mortgage offerings. "A borrower in distress looks a lot like somebody trying to figure out what rate they can afford, what product they're eligible for," she explains. "There were a lot of similarities [between products], and our rules writers had less challenge trying to do the servicing than you would have thought for someone new to this business." The market arrival of Commerce Velocity's Optimizer solution followed a similar origination-to-servicing trajectory, albeit with one merger-and-acquisition road bump. Bear Stearns' EMC outfit took an interest in the company's software in late 2007 and commissioned a servicing-specific system that was made available the following March, explains Fred Kopke, product director. After JP Morgan Chase took over the investment bank shortly thereafter, Commerce Velocity regained its intellectual property and began offering Optimizer to the broader servicing audience last summer. "There's no LOS stuff going on, so everyone's followed suit, whether that's technology reinventing or underwriters starting to work for loan mod shops, or CEOs of loan origination companies that are either doing [real estate owned] services or foreclosure services," Kopke says, "because that's their monthly activity today." Optimizer bears an aesthetic resemblance to the company's origination platform, and system designers reused elements such as vendor integration and the basic rules engine framework. Other pieces had to be revamped, namely changing valuation interfaces so that they reflected a depreciating property value model rather than an appreciating model that has little utility in today's marketplace. As servicers contend with a rapid influx of new programs and a growing volume of problem loans, many shops are facing a critical question surrounding technology: When it comes to default systems, is it better to build or buy? "While volumes here are considered somewhat temporary, they're still very real, and they're still increasing through this year and probably to next," Kopke adds. Ocwen – a company whose business model from the start involved rehabilitating non- or underperforming loans – subscribes to the DIY school of thought. The West Palm Beach, Fla.-based servicer has spent more than $100 million in research and development over the past decade, resulting in a proprietary servicing platform that covers all the common tools of the loss mitigation trade: artificial intelligence, rules-based systems, scripting engines and net present value cashflow algorithms. "What's needed, in short, was a robust technology system that not only properly accounts for all these variables for one loan, but if you're going to be successful with a loan mod program, the technology has to be scalable – and scalable to handle what are unprecedented volumes of delinquencies," says Paul Koches, Ocwen's executive vice president. Few shops can match Ocwen's appetite for technology investment, which may lead smaller companies to pursue the many ready-made offerings that exist. Overture's Simmons says that while the company initially anticipated most of its business would come from subprime or specialty servicers, the administration's Making Home Affordable program sparked inquiries from other parts of the market. "When we first started off, we thought it'd be those individuals in the industry who just think differently," she says. "When the Obama plan came out in March, we started getting calls from thrifts and credit unions and midsized institutions that realized they can't do this manually and that they need the rules. The interest in technology has actually heightened in the last few mon

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