BLOG VIEW: Given the changes in the servicing industry over the last few years, it has become clear to lenders that in many cases, it simply is not in their best interest to service their own loans.
Having a robust compliance management system is a requirement for servicing businesses today – so, lenders are leveraging the investments subservicers have made in those systems in order to better control their own risk while, at the same time, drastically cutting operational costs.
As such, two benefits are gained for the price of one.
But, what some lenders still don’t realize is that they can actually make outsourcing a ‘three for one’ by sending their distressed and at-risk loans to a special servicer that can meaningfully increase loan performance.Â
Risk control and cost management have been two clear advantages fueling subservicer growth in recent years, as banks refocus precious resources on their core strengths in lending while letting subservicers handle the increasingly complex task of mortgage servicing.
Having a critical mass of servicing business is necessary to justify building out and maintaining both the infrastructure and human resources needed to run a compliant servicing operation – even if only a small percentage of the portfolio is delinquent.
Having competent servicing and compliance staff in place is expensive. What’s more, the necessary enhancements in quality control, quality assurance and internal audit teams can become major drags on profitability.
Outsourcing with compliant servicers helps lenders avoid painful regulatory actions that can result in significant damage to the company brand.
Although the abilities to better manage cost and reduce risk are the main value propositions to using a subservicer, the positive impact of improving loan performance by using a special servicer is underappreciated.
Bifurcating portfolios by putting distressed loans with a special servicer and cleaner loans with performing servicers allows a lender to optimize performance and limit costs and risk.
When it comes to the more troublesome loans that hurt the balance sheet and drain the most resources, lenders are seeing the financial upside that niche special servicers can have by making contact, building engagement and keeping borrowers in their homes – not just being compliant.
For portfolio loans (not securitized), accomplishing modifications that move assets from non-accrual into accrual status – and collecting on the new payments – can often result in a six-digit swing in value when one accounts for the capital treatment and long-term cashflows.
Further, the lender enjoys the renewed ability to cross-sell to what is likely now a more loyal borrower.Â
Similarly, establishing re-performance on a defaulted Federal Housing Administration (FHA) loan can positively affect a lender’s compare ratio, create re-securitization income, eliminate servicing advance requirements and simplify reporting efforts, all of which significantly help the bottom line.Â
Capturing those results on every defaulted loan is not easy, but if a lender is only expecting its subservicer to keep it out of trouble as it processes foreclosures, then the lender isn’t expecting enough.
It is understandable why special servicers have historically been viewed as a commodity-like liquidation service. However, today’s special servicers understand that they need to solve problems in order to outperform.
This has driven operational shifts in the industry because in order to solve problems, servicers need to know more about each delinquent borrower’s situation. And, that can only happen if the servicer develops a strong relationship with the borrower.
At our firm, we encourage our account managers to have long calls with borrowers, which are often the result of completing free, in-depth personal budget analyses with them. This helps us to understand as much about each borrower’s financial situation so we can determine the optimal resolution.
In other words, we don’t just make the calls required by the FHA, Fannie Mae or Freddie Mac and take in the minimum amount of information. Instead, we make quality calls with highly trained mortgage professionals that can build rapport and trust as they attempt to find a solution for the borrower – and at the same time, save the lender money.
Bifurcating the servicing of performing and at-risk/nonperforming portfolios has become an attractive strategy for many lenders as they realize the economic benefits, as well as the cost and risk benefits.
Innovative pay-for-performance deal structures and new technology make the effort of integrating special servicing capabilities with a lender’s platform even more enticing, both from a financial and process perspective.
Once a lender spends time looking at all of its subservicing options, the outsourcing trend may make even more sense than originally thought.Â
Tucker McDermott is co-founder and executive vice president of Chicago-based Fay Servicing, a special servicer that manages residential mortgages for banking institutions and alternative real estate investors.