Despite Efficiencies, Servicers Challenged By Regulatory Flow

REQUIRED READING: With more – and more intensive – investor and regulatory requirements being heaped upon servicers on an almost daily basis, the goal of cost containment seems unattainable. The increasingly stringent mandates have not, however, prevented small and midsize servicers from becoming leaner, more efficient operations.

Take, for example, Fishers, Ind.- based Stonegate Mortgage Corp. In mid-2009, the company, which had been seeking to add a servicing component to its origination platform, merged with Mansfield, Ohio-based Swain Mortgage Co. At that time, Swain Mortgage's servicing portfolio totaled approximately 1,700 loans. Two years later, the combined outfit services roughly 7,500 loans with a total unpaid principal balance of about $1.1 billion.

Since the merger, the company's servicing team has added only one employee, according to John Swain, executive vice president of loan administration. Stonegate Mortgage's ability to keep staffing levels essentially unchanged has been aided, in no small part, by the company's prudent lending standards. Unlike many of their larger competitors, Swain Mortgage and Stonegate Mortgage steered clear of exotic products during the housing boom.

"Our costs have not changed significantly," Swain says. "Because we have low delinquencies and foreclosures, we have not had to oversize our loss mitigation staff. We're still fairly lean, but effective."

The same is true at Richardson, Texas-based Guardian Mortgage Co. Inc., which services a $2.18 billion loan portfolio. The company outsources no servicing functions, meaning its 20-person team handles everything from payment processing and collection calls to escrow administration.

"The best thing we ever did was focus on responsible borrowers and loans that made sense, which reduced our need to have significant overhead tied to our loan modification, loan workout and accounts receivable departments," says Marcia Phillips, president and CEO. "With a delinquency ratio of just around one percent of our loan portfolio, we are able to maintain a very small staff in those departments that are growing exponentially with other servicers."

Delinquency levels are not quite as stable at NYCB Mortgage Co. LLC, which services approximately 91,000 loans with a total unpaid principal balance of $18 billion. Most of the distressed assets under NYCB Mortgage's purview stem from a residential loan portfolio that the company acquired from AmTrust Bank as part of a loss-share transaction with the Federal Deposit Insurance Corp.

Although NYCB Mortgage's first senior vice president, Paul Harris, admits that certain loss mitigation activities, such as executing short sales, are more difficult to resolve than they used to be, he notes that the servicing department has, like much of the industry, undergone a philosophical shift in which cost efficiencies take a backseat to borrower assistance.

"If you measure productivity purely at units completed or calls handled, we're not as efficient as we were in the past," he says. "But over the last several years, our objectives and our focus have changed, too. Our primary objective is to determine why a borrower is delinquent and assess ways we can help the borrowers keep their homes. While we obviously want to collect the outstanding debt, the contact is less collections and more consultative."

Although Stonegate Mortgage and NYCB Mortgage may appear to be worlds apart in terms of portfolio size and composition, both shops, as well as other servicers who were sources for this article, do share a common denominator: an improved leveraging of technology.

Tech to the rescue

Ed Hirsch, a former servicing executive who currently serves as managing director of surveillance and oversight at New York-based Risk Management Group, views technology as low-hanging fruit for small servicers that are still struggling with manual assessments of loan modifications.

"There are products out there for servicers to build models that should be able to take in borrower financials, load them into a system, run them against investor- or servicer-approved modification plans, and spit back out to the individuals multiple options available to the borrower," he says. "You've got to have the information and the budget to do it. But the mentality of throwing more bodies at it, in this environment, does not work."

NYCB Mortgage, whose servicing operations are based in Cleveland, uses a workout analytics tool from Fiserv that ensures consistent communication between the company's home-retention specialists and distressed borrowers. The system's rules-based engine pares down workout solutions and provides an opportunity for representatives to educate borrowers on their options, Harris explains. The tool also creates downstream benefits.

"There's no question that it's reduced cycle time in the long run, because we're managing the borrowers' expectations while we have them on the phone," he says. "They know what type of information we're going to ask them to validate, so it's a more efficient phone call – and it results in fewer calls to the borrower to get all of the information that we need to determine the appropriate workout solution."

Harris, who is currently considering enhancing the company's technology by adding an REO-specific platform, also finds value in the consulting services that Fiserv provides. In the past five years, the technology vendor has conducted operational reviews "on pretty much every area" of NYCB Mortgage's servicing department, Harris says. By sitting down with frontline associates, Fiserv consultants have identified processes that can be further streamlined.

"It's a worthwhile investment to make sure we're operating efficiently in terms of leveraging the capabilities of [Fiserv's] LoanServ servicing system," Harris says.

But servicers are also finding automated assistance apart from loss mitigation activities. Troy, Mich.-based Towne Mortgage, whose AmeriCU Mortgage affiliate offers origination and servicing services to credit unions, is using technology to improve borrower communications in areas wholly unrelated to default management.

The company's primary technology vendor, GCC Servicing Systems, has enhanced Towne Mortgage's email system. The upgrades enable Towne Mortgage to automatically notify borrowers of when their payments are due and when a payment has been applied. Once fully implemented, the system will also identify if, for example, a borrower's homeowners' insurance premium is higher than the rate charged to comparable properties in the servicing portfolio, says Don Calcaterra Jr., Towne Mortgage's president.

"We're excited about those areas, because we're actually seeing things that achieve a dual purpose of streamlining our internal operations and increasing the value to our customers," Calcaterra says.

In 2005, Swain Mortgage began its conversion from a homegrown legacy platform to an origination and servicing package developed by Harland Financial Solutions. But it was not until the loan portfolio expanded with the Stonegate Mortgage merger that servicing personnel realized the full potential of the new platform, Swain says. Stonegate Mortgage has also instituted a lockbox that enhances the efficiency of payment routing, as well as added "all of the online payment solutions that a customer could want," he says. The result has been fewer inbound phone calls.

"Despite substantial growth in our portfolio, we have not experienced a proportionate increase in phone call volume," Swain says. "To me, that is proof of two things: One, our people do a great job of setting up loans, and two, our website is doing a great job of carrying the inquiry load for customer information."

Responding to regs

Servicers are hungry for any type of productivity boost – technology-based or not – that can be achieved in the current environment. Increasingly, productivity correlates with the deft management of ever-changing regulatory and investor guidelines.

Mindful of the tougher regulatory climate, NYCB Mortgage centralized its quality control and compliance teams last year, as well as created a unit to review loan files to ensure compliance with investor guidelines and department objectives. The unit's reviews also ensure NYCB Mortgage exhausts all opportunities to work with a borrower prior to referring to foreclosure, Harris says.

The compliance function is a separate department outside of servicing that interprets new federal and state regulations, as well as investors' policies impacting the servicing and default functions, he explains. The centralized group in servicing is responsible for monitoring and ensuring the implementation of those changes within each of the functional areas of servicing.

The organizational change has alleviated for department managers the burden of tracking rule changes. In turn, NYCB Mortgage has become more agile, as the company is now able to re-allocate existing employees as necessary. The company also cross-trains default personnel who possess the appropriate skill sets so that they are able to move across departments and respond to volume fluctuations in the portfolio.

Other servicers report that they have added to their compliance departments. Towne Mortgage has bolstered its staff in default management, compliance and quality control because, as Calcaterra puts it, "Servicing didn't change from 1960 to 2008, and since 2008, it hasn't stopped changing."

Guardian Mortgage has likewise added staff because of new investor reporting and regulatory requirements, Phillips says. Specifically, she points to a recent development in Michigan that required a loss mitigator with the company, which maintains an office in the state, to be licensed as a loan originator. Absent a licensed originator, Guardian Mortgage's servicing staff would be unable to discuss with Michigan consumers the terms and conditions of loan modification agreements.

"We had to spend a lot of time getting one of our guys licensed in the state of Michigan to do what he's been doing well for the last two years," Phillips says. "I hate to say it's meaningless, because somebody in Michigan could read that and get upset, but it is meaningless as far as having to be licensed to do a good job of providing service to our customers."

GSE servicing alignment

All of the servicers who participated in this article service loans on behalf of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which are in the midst of aligning their default management rules. With the newly aligned guidelines come tougher requirements for tasks such as contacting delinquent borrowers, as well as additional reporting. Opinions are mixed as far as the strain that the new guidelines will place on servicers' efforts to comply.

The focus of the GSEs' new requirements was unquestionably honed in response to an analysis of mega-servicers' practices, says Calcaterra. To him, certain obligations – such as the requirement that servicers call delinquent accounts every three days until a quality right party contact has been established – may be overkill for smaller organizations.

"I think it's the result of an extreme amount of data-crunching at very, very large servicers that don't have the same relationship with their borrowers as we do," he says. "When you apply [the rules] to smaller, community-based organizations that have a stronger relationship with their borrowers, I think they may not be necessary."

Harris, however, notes that the closer Fannie Mae and Freddie Mac align their guidelines, the better. Having to manage one GSE default management rulebook instead of two will help to simplify staff training and the monitoring of changes.

"In the long term, there's going to be savings, not only in time, but also the quality-control aspects we put in place to make sure we're adhering to investor guidelines," he says.

Regardless of whether the GSEs' servicing-alignment initiative improves or worsens compliance matters, servicers agree that additional investor and regulatory default management requirements essentially offset gains found elsewhere in servicing enterprises.

"I think we are achieving efficiencies in the servicing area, but I don't think we measure those efficiencies by traditional standards, which would be a reduction in cost, because we're getting additional layers of responsibilities placed on us," says Calcattera. "The efficiencies are softening the costs of these additional servicing requirements, but it's not resulting in an overall reduction of the cost to service."

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