REQUIRED READING: The much-quoted expression ‘May you live in interesting times’ is reputed to be either a proverb or a curse that originated in ancient China, although there is no evidence to confirm its centuries-old origins. For the subservicing sector, the double-edged notion of living in ‘interesting times’ has a significant contemporary resonance. Indeed, the past year has been more than a little interesting – a seemingly nonstop skein of settlements, rules, regulations and threatened litigation has made mortgage banking anything but boring, and the dizzying effect of these changes has created very interesting challenges for subservicers.
‘We're operating in a zero-tolerance, zero-defect environment,’ observes Gene Ross, president of LoanCare Servicing Center, based in Virginia Beach, Va. ‘State and federal agencies and clients are looking for perfection. This is hard to accomplish, especially when the playbook keeps changing.’
Ross adds that keeping track of the changing requirements is not helped by the frequent abruptness that permeates the current regulatory environment.
‘Many regulations come out without due process – they just come out,’ he says. ‘The time frame for their implementation is very short.’
And few people expect the situation to become easier this year.
‘This year will be a challenging carryover from 2012,’ predicts Brad Durrer, mortgage operations manager at Wipro Gallagher Solutions Inc., headquartered in Franklin, Tenn., who notes that last year's precedent-setting National Mortgage Settlement and an increased vigilance by state regulators will continue to impact the work of subservicers.
Jeffrey Berg, director of surveillance at Shelton, Conn.-based Clayton Holdings, points out that subservicers are under the regulatory magnifying glass due to the oversight and compliance requirements being placed on the servicing industry.
‘It requires subservicers to maintain the same standards as servicers,’ he says, adding that this new level of scrutiny comes with a price. ‘Subservicers may not have the balance sheet to support such changes.’
Mary Kladde, president and CEO at Denver-based Titan Lenders Corp., concurs. ‘Subservicers need to meet the new requirements associated with data,’ she says. ‘And some of these costs are going to be substantial.’
Annemaria Allen, president and CEO at The Compliance Group, based in San Marcos, Calif., points out that subservicers that are now subject to California's new Homeowner Bill of Rights also run the risk of being forced to shell out large amounts of money.
‘There are some provisions in the bill that are onerous and can cost subservicers a lot of money if there are mistakes made,’ she says. ‘The bill has fines and penalties that go up to $10,000.’
Furthermore, Allen notes that a Consumer Financial Protection Bureau requirement redefining the lender-vendor relationship further complicates things.
‘Many lenders who use outside subservicers will now have to monitor them,’ she says. ‘And a lot of subservicers are not used to that.’
A new playing field
Although subservicers are experiencing a surplus amount of agita from Washington and many state capitals, they are also benefiting from the changing mortgage banking landscape.
‘A lot of originators are not selling servicing rights – they are putting them with subservicers,’ says Ed Fay, CEO at Springfield, Ill.-based Fay Servicing. ‘That was not done in the past.’
LoanCare's Ross notes that a number of large depositories exited the correspondent and wholesale sectors last year, which resulted in many mortgage banking companies retaining assets that were previously handled by the now-departed institutions. As a result, these companies began to rely more on subservicers.
‘They needed to learn a lot about the attributes of the mortgage servicing rights they now had,’ he says. ‘Our capacity has doubled in the last 12 months. Many companies that we work with do not understand all of the characteristics of this asset.’
On the reverse mortgage side of the business, distinctive subservicing challenges have percolated.
‘The number one issue has been tax and insurance defaults,’ says Ryan LaRose, president and chief operating officer at Lansing, Mich.-based Celink. ‘There is no escrow with a reverse mortgage and no monthly payments. The borrower is ultimately responsible for paying for taxes and insurance.
‘But if a borrower has a life-changing event and cannot pay the tax or insurance bill while there is still money in the home,’ LaRose continues, ‘the servicers can force a draw to pay the bill. The real challenge, however, would be if the borrower has no one to go to for help in paying the delinquent tax and insurance bills – the absolute last response would be to move into foreclosure and eviction.’
One concern that is not preoccupying LaRose at the moment is competition – Celink is among the few companies that subservice reverse mortgages. ‘It is still very much a niche cottage industry,’ he says.
On the forward side, today's subservicers are also not seeing the stirrings of new competition. Fay points out that the regulatory environment works against companies abruptly arriving and setting up shop.
‘It is getting much harder to get into this field,’ he says. ‘If we tried to get into it today, it could take us two years.’
Rick Sharga, executive vice president of Santa Ana, Calif.-based Carrington Mortgage Holdings, observes that any company seeking a foothold in this sector would do better to follow the merger and acquisition route.
‘We are seeing bigger players starting to acquire different platforms,’ he says. ‘The barriers to entry for setting up a new shop are difficult, unless you set up under a bank structure. Thus, the larger players will pick up the smaller players.’
And for those who seek to expand into subservicing, Sharga predicts the next 12 months will see the rise of a niche focus.
‘We will see more component servicing as a subset of subservicing,’ he says. ‘More shops will specialize in short sales and other types of loan modifications.’