REQUIRED READING: Robo-scandals, government intervention and intensified investor pushback are just a few of the ingredients that combined to rock the servicing industry in 2010. To get some perspective on all that transpired in the past 12 months, as well as predictions of where the industry is heading in the year ahead, Servicing Management (SM) reached out to a varied panel of servicers and outsourcers. In the pages that follow, the following individuals share their thoughts on the state of mortgage servicing:
- George Fitzgerald, senior vice president of product strategy, Lender Processing Services;
- Frank McKenna, vice president of fraud strategy, CoreLogic;
- Steven Horne, CEO, Wingspan Portfolio Solutions;
- Dave Worrall, national servicing manager, RoundPoint Mortgage Servicing;
- Greg Hebner, president, MOS Group Inc.;
- Gagan Sharma, CEO, BSI Financial Services;
- Duke Olrich, CEO, DRI Default Management Systems;
- Edward Pinto, resident fellow, American Enterprise Institute; and
- Wade Comeaux, president, Fay Servicing.
SM: There were plenty of twists and turns for the servicing industry in 2010. When you look back, how would you define mortgage servicing in the past year?
George Fitzgerald: I would define it as the year of continued change in loan modification programs. We began the year with certain mod programs in place, and throughout the year, the government and servicers both focused on tweaking and enhancing those programs to help homeowners stay in their homes.
Frank McKenna: The Home Affordable Modification Program (HAMP) turned out to be a lot of work and effort for very little benefit. If anything, HAMP distracted servicers from developing more targeted techniques to modify the loans and foreclosing or using short sales for the loans that were never going to perform. The welter of defaults and loans that now need to be dealt with are higher than ever, and servicers will be challenged with getting out of this mess over the next two years.
Gagan Sharma: Mortgage modifications helped define this sector. But next year there will be a shift away from modifications as the only solution as there's a greater realization that not all foreclosures can be prevented and that not all borrowers can be kept in their homes. Short sales have become a bigger piece of loss mitigation. As an industry, we have to figure out how to do them in a reasonable and mutually respectful manner. That's been one big change.
Wade Comeaux: The year was defined by rapid change and hard work. I have not witnessed such substantial change or government and media attention in any other year.
Dave Worrall: We saw the rise of special servicing. In early 2010, large servicers struggled to implement various government programs, and this focus hampered their ability to aggressively asset manage the riskiest parts of their portfolios. Playing offense, investors refined their strategies for selecting high-risk segments of their portfolio and placed these segments with special servicers.
Steven Horne: I would describe it as a pivotal year for mortgage servicing and certainly the year the industry discovered its limitations. Operating on thin margins, servicers were forced into a situation where they had to find and train people to deal with the situation, and we've learned that numbers alone aren't enough to achieve success. Neither the ergonomics nor the economics work under their business models.
Edward Pinto: Servicers faced a year of nearly overwhelming challenges: getting through the overhang of HAMP trial modifications, working through the complexities of HAMP and ramping up proprietary modification programs.
Duke Olrich: In 2010, we realized that the excesses of the past created a problem whose effects will not be measured in months or years, but over a decade or more. The lack of resources allocated toward the servicing side of the mortgage business since the 1980s came back to haunt us.
Greg Hebner: The year started with everyone focused on how to move borrowers through the Making Home Affordable loan modification program, which presented its share of challenges because of the way the program was designed and rolled out. Early in the year, program changes were announced – the most substantial being the elimination of trial programs without borrower approval – which created major process changes that had to be directly addressed.Â
SM: The industry was rocked unexpectedly by the affidavit debacle. What lessons are to be learned from that situation? Does the matter speak most directly to concerns about industry consolidation and a broken mega-servicing model of business, or a lack of quality control? Both? Neither?
Edward Pinto: It speaks directly to a broken mega-servicing model. Ongoing missteps by some of the nation's largest lenders are counterproductive. These lenders need to clean up their act, or it will make it harder to undertake needed reform of the housing finance system.
Dave Worrall: The affidavit issue is a reminder that precision in the servicing process is paramount – even to capacity. Large and small servicers are equally capable of processing foreclosures in accordance with applicable rules if they effectively interpret and implement them. It is, however, these rules that are the real problem. The rules differ by state – sometimes even locale – and are routinely modified. It is immensely difficult for national servicers, attorneys and regulators to understand, track, staff and build unique processes for each variation of the rules.
George Fitzgerald: I think servicers understand that they must pay very close attention to their processes and procedures, and most have instituted even more aggressive checks and balances to ensure that processes are documented and followed. In the few instances where mistakes were made, I believe they were largely associated with the rapid run-up in volume, but it highlighted the need to further strengthen change-management capabilities.
Gagan Sharma: There was overconsolidation, and these few, very large shops were in a quest to streamline and lower costs. But consolidation led some people to try to do it ‘quicker, cheaper, faster,’ and quality got negatively impacted in the quest for volume. Even on the foreclosure side, you're hearing that the larger foreclosure ‘mills’ are the ones in trouble because they resorted to these robo-signing procedures. That should lead to more people stepping back from the ‘bigger is always better’ mantra.
Frank McKenna: I think it speaks the sheer volume that they are being forced to work with, combined with the need to work faster and more efficiently. You could say that is a result of the mega-servicing model, which means the brunt of the volume needs to be handled by a few of the largest servicers.
Steven Horne: It is difficult to focus on quality when you are quite literally overwhelmed, as primary services have been for some time. Once a loan defaults, everything that happens is a drain on servicers' budgets and resources. It is not that servicers don't want to provide quality – they do. They simply have lacked the resources to do so and haven't invested sufficiently in technology and other solutions that would help.
Greg Hebner: This foreclosure issue is another symptom of large servicing platforms being challenged to handle the high volume of disparate delinquent loans that were borne out of the current housing crisis. It is just one more example of how size matters in servicing, and in the case of a high volume of delinquent loans, it is actually a detriment.
Wade Comeaux: Without question, all servicers have bandwidth challenges. We agree the largest ‘big-box’ servicers face the biggest challenges. They usually have legacy issues and have teams and processes built to focus on reducing costs and maximizing efficiency, rather than solving the complex, ever-changing problems facing us today.
Duke Olrich: The lessons to be learned relate to keeping focused on the small things, because ‘the devil is in the details’ when it comes to loan servicing. Legally accurate documentation is critical, and the industry should have been realistic about the possibility of someone checking for completeness and accuracy. It's not enough that the loans defaulted, as we've learned.
SM: Does the heightened scrutiny of servicers' foreclosure processing portend a shake-up at the investor level in terms of how servicers are to approach outsourcing?
Steven Horne: Absolutely. None of the consequences of the foreclosure affidavit crisis is lost on investors. Now, with the ability to foreclose in question, investors are driving the decision to outsource expertise and capacity to companies that can offer both.Â
Dave Worrall: Servicers will have to enhance their selection and oversight processes for vendors. Regardless of a vendor's past reputation or the endorsement of a government-sponsored enterprise (GSE) or big bank, the servicer is ultimately responsible for the vendor's work.
Gagan Sharma: Outsourcing is a clear and legitimate goal. But obviously it has to be done in an appropriate manner so that quality doesn't suffer. Is it going to mean there are going to be some changes? I believe so, for sure. And what those changes are will depend to a certain extent on what the new regulations are. But the regulators are going to do something.
George Fitzgerald: I think investors are going to require outsourcing to be more closely monitored. I think they will want to more closely monitor it and make sure certain functions, such as document signing, are handled in-house.
Duke Olrich: Servicers can look forward to frequent and significant oversight by investors and regulators, along with new, more intrusive audits of platforms and systems.
Greg Hebner: The volume and complexity of today's servicing needs require increased specialization as well as the ability to manage a range of different external functions. It is very possible that investors could mandate the use of outsourcers to perform certain tasks that are currently being performed primarily by servicers.
SM: 2009 was said to be the year of the loan modification, and 2010 was expected to be the year of the short sale. What's loss mitigation going to look like in 2011? A return to normalcy and tighter timelines? More aggressive modifications? Further government involvement?
Steven Horne: All of the above, I feel. As an industry, we're getting better at executing loan mods and we're starting to get short sales figured out. I am especially encouraged about short sales – we ran a real risk there for a while of losing the engagement of the real estate professionals in short sales. The process, when handled by the overloaded servicer, was marked by delays that caused the Realtor and the prospective buyer to move on to greener pastures. Using technology tools and methodology that circumvents the delays of the past make short sales a completely viable means of keeping the market moving and avoiding more real estate owned (REO).
Dave Worrall: Things will start to return to normal. The government programs in place are getting through their shakeout period. Servicers have applied the programs to large segments of their books and are now refocusing and collaborating with their investors on proprietary approaches to loss mitigation. These proprietary programs will make additional, and potentially more aggressive, modification options to borrowers. However, the renewed focus will most likely continue to bring into balance the number of retention and liquidation workouts done by servicers.
Gagan Sharma: 2010 was supposed to be the year of the short sale, and given the complexity of the process, 2011 is going to be more of the same. I think REO is going to be an even smaller portion of the market.
Wade Comeaux: The current administration has shown their commitment to involvement in resolving America's housing problem. One can debate the quality of their decisions and the results, but no one can say they have not been deeply involved.
George Fitzgerald: I definitely don't think it will be a return to normalcy just yet. I do think that servicers will continue to aggressively pursue loan mods. I do think there will be further government involvement as programs continue to evolve and more reporting is required. I also think we are going to continue to see foreclosures climb since not all loans are modifiable.
Frank McKenna: In 2010, there was an increase in short sale activity. Short sales, on average, cost the lender less and have higher average sales prices than foreclosures, so they are a great strategy that I expect will continue into 2011. The problem with short sales is the time involved in getting approval and all of the paperwork involved. If market prices start to increase again in 2011, short sales may become even more attractive since the lenders would take even fewer losses. Unfortunately, the government will probably continue to get involved in the modification and foreclosure process – I say ‘unfortunately’ because the government-sponsored programs like HAMP were not successful.
Greg Hebner: Although [short sale] volumes are picking up, we are still not moving nearly enough transactions through to prevent a massive buildup of foreclosure inventory in 2011. I do believe that 2011 will be the year of the liquidation – either through short sales or REO, more properties will be sold next year than in 2010. It will also be the year of the real estate investor, as this segment of buyers will become increasingly important to helping to absorb high volumes of inventory in a very credit-restrictive lending environment.
Edward Pinto: Notwithstanding the affidavit debacle, 2011 will be the year of the foreclosure. The Obama administration and regulators have finally come to the conclusion that further postponement of foreclosures would be counterproductive. The market needs to clear and losses taken.
SM: What should servicers expect at the borrower level? Will strategic default continue to increase?
Dave Worrall: Strategic default will continue to be a media mainstay in 2011. However, strategic default also costs borrowers when it affects their credit history, limiting their ability to borrow, sometimes even affecting their employment. Borrowers will be much more aggressive in seeking alternatives with their servicers as the costs of strategic default are publicized.
George Fitzgerald: As long as property values continue to fall, we will continue to see strategic defaults. There is a high volume of foreclosures out there, and consumers know it is taking a long time for defaulted loans to go through the foreclosure process. If they are already struggling to make their payments and they don't see the equity coming back into their homes, the likelihood that some will choose to default will continue to rise.
Steven Horne: If they acquired the house as a financial investment and have no other reason to stay, that's one thing. But the family who truly has a personal investment in their community is willing to make virtually any sacrifice to keep their home.Â
Wade Comeaux: More often than not, borrowers default strategically when they feel they have no other options. If a servicer is proactive, listens, treats the borrower with respect and provides them a value proposition with the borrowers' goals in mind – such as down-payment or moving-cost assistance – most borrowers will assist in helping find a less expensive, less time-consuming and more mutually beneficial resolution.
Duke Olrich: Strategic default will continue to be a threat, particularly in the high-dollar areas and among the McMansions, as there was more air to be deflated from the balloon in those segments. For the majority of Americans, however, these are homes, not just houses, and these borrowers will be far more inclined to ride out the storm.
Frank McKenna: Strategic default becomes more commonplace over time and less of a stigma. Servicers will need to figure out how to identify strategic defaulters and treat them differently to avoid losses.
SM: As the Obama administration and Congress look ahead to addressing the GSEs specifically and housing finance more broadly, what are your expectations for how reform will affect servicing? What would you like to see happen?
George Fitzgerald: What I think will happen is significantly more reporting and governmental oversight of servicers, regardless of how the GSEs are addressed or the way housing finance evolves. What I would like to see happen is for the government to allow the industry/market to move in the direction it is inclined to go without artificial hurdles that postpone or delay the inevitable, such as the foreclosures that must be completed for the housing market to stabilize.
Dave Worrall: In my opinion, the administration will consolidate the activities of the GSEs. I expect consolidation will anoint a single servicing standard and give a single entity authority for overseeing servicing. This authority will be used to require all servicers to either perform high-touch servicing or outsource the default work to a special servicer capable of the model.
Gagan Sharma: I think the GSEs are going to be around in some shape or form. Right now, together with the Federal Housing Administration, they account for nearly 100% of the market. I think they should probably go back to a focus on affordable housing and let the private sector deal with the other parts of the market. There is a role for the government in affordable housing, but it shouldn't be in every sector of the housing market.
Wade Comeaux: I will focus on what we would like to see. We believe improving oversight is important, and we hope there is a commitment to ensuring that all requirements and reporting truly add protection and value to the consumer. Each requirement leads to an expense, and at minimum, a portion of that expense is passed on to the home buyer. The government must ensure the expense provides adequate value. We also hope the requirements are clearly defined, reporting is streamlined and the expectations are as consistent as possible.Â
Steven Horne: I would like to see a greater definition in the roles of the various parties engaged in loan servicing. Fannie Mae and Freddie Mac, as they have done for decades, set the tone for the rest of the mortgage investors out there. But with their futures in doubt, I think we'll need a strong framework in place if we're to attract real liquidity once more.
Frank McKenna: Personally, I would like to see more fraud-related controls in servicing. I would like them to implement use of fraud tools and technologies that many of the lenders have implemented to root out fraud. As the origination process has become better controlled, the servicing areas have had less of a focus on fraud because it just hasn't mattered as much to them.
Duke Olrich: Something's got to give when it comes to servicers' capabilities to deal with problems from something other than crisis mode. I'd like to see meaningful change that gives servicers a chance at handling the next crisis, and I would like to see them using available technologies that will give them an advantage going forward. I would also like to see the servicers' interests more aligned with the investors.
Greg Hebner: I would like to see servicing separated into two segments – performing and nonperforming servicing. Loans that are beyond 60 days delinquent need a level of care and interaction that is very difficult to do with high volumes but, with the right borrower interaction and engagement, can produce tremendously different results for the investors. Look for the administration to push even tighter requirements on the service levels achieved by servicers and be punitive if these requirements are not met.
Edward Pinto: Efforts at reform will be driven by a focus on originations and investor issues, not servicing, making servicing the tail. This makes it hard to handicap the impact on servicing. I would like to see a return to commonsense underwriting, a greater emphasis on knowing your customer, a return to thrift, more skin in the game by borrowers and lenders, and simpler products and disclosures. If these things were done, most of the grief servicers are experiencing would disappear.