PERSON OF THE WEEK: The ever-evolving world of loan servicing is facing big questions: How many distressed borrowers can actually be kept in their homes? What's a responsible, yet efficient way to trim real estate owned (REO) inventories? What will future default servicing arrangements look like? Is the pay scale always going to be like this?
To get a sense of the possible directions in which servicing could head, MortgageOrb this week picked the brain of industry veteran David Vida, chief strategy officer and executive vice president of loan servicing for LenderLive Network Inc. The Denver-based mortgage service provider has tapped Vida, founder and former CEO of Acqura Loan Servicing, to lead its servicing unit, which expanded into subservicing and specialty servicing earlier this year.
Q: How would you characterize the current market for specialty servicers? Do the big shops' headline-making woes portend more business opportunities for niche outfits?
David Vida: Most specialty servicers that sprung up during the last few years were originally built to facilitate the transfer of end-to-end servicing and were geared to support the new owners of the assets. However, that market or expectation of a market came to a stop in 2008, and as a result, not a lot of nonperforming loans have traded at the levels that everyone believed. During the last two years, the issues that big servicers have had to address have been obvious (high level of defaults, workforce scalability, etc.) and are complicated by their sheer size and their volume of loans.
Specialty servicers have positioned themselves to support the "weaknesses" or obstacles a large servicer may have, including flexibility, innovation, new technology, different staffing models and capacities. There seems to be a tremendous need for specialty servicers, and some larger shops have embraced the concept of partnering and/or outsourcing with a nontraditional servicer.
To date, however, it has been the other parties (asset owners, at-risk parties, etc.) that have fully embraced specialty servicers. There needs to be movement or sale of assets and a continued evolution of the servicing industry business model (such as bifurcation) for true specialty servicers to prosper.Â
Q: With servicing at something of a crossroads, several proposals have recommended that future securitization contracts include language mandating the bifurcation of performing-loan servicing and nonperforming-loan servicing functions. What are your thoughts on these types of proposals, and do you believe there are obstacles or unintended but negative consequences that make bifurcation unrealistic or unappealing?
Vida: The idea of bifurcation is okay; however, having traditional bifurcation – at a past-due date, for example – is really just doing the same thing a little differently. In other words, the opportunity is to leverage expertise but do it intelligently with a new approach.
We believe that the future of servicing must embrace the idea and put into operation the concept that all loans should not be serviced in the same manner. You cannot treat every borrower or every asset the same and push each loan down the same path. There must be a level of intelligence, risk assessment or customer values placed on each relationship and have that relationship drive the bifurcation points.
Realistically, it is a challenge for traditional servicers to understand how to operate in a non-linear manner, and as such, the current movement is to consider moving the loans at a point in delinquency. However, we view it in a similar manner as risk adjustments that have been made on newly originated loans. There are attributes that can be quantified at the point of origination that provide some insight into the borrower and the property that could identify a borrower who should be handled by a specialty servicer. We also believe that most borrowers who have completed a modification may require actual help and a different kind of servicing to minimize the likelihood of redefault.
Outsourcing – or, in this case, modifying – the traditional servicing process to accommodate expertise to manage the asset, is a good idea. The opportunity is to be innovative and less traditional in designing the ultimate solution.
Q: As a component service provider, LenderLive has an inside view of servicers' loss mitigation activities. What types of trends have you observed in terms of workout strategies?
Vida: The larger servicers are still reacting to requirements of government or quasi-governmental agencies and other constituents (investors, shareholders, etc.) regarding the management of delinquency and loss mitigation. It appears that the priorities are focused on programs and adherence to guidelines instead of really performing true loss mitigation. The purpose of loss mitigation is finding a balance between what makes sense for the borrower and ultimately minimizing the losses.
Fundamentally, this is not a math equation or a simple stay-or-leave scenario. Loss mitigation is an art and can be refined through intelligent technology and experienced staff. It is inappropriate to push every borrower down the same path, because that approach ignores the necessity of balancing the needs of the borrower and those of the asset owner. It may be a great solution for the asset owner, but if the borrower is not engaged and/or cannot really make the housing situation work, a modification might be the worst thing for that individual.
We are seeing private owners of assets be more creative and flexible in managing the balance between their needs and the needs of the borrower while understanding the competing concerns. Seller financing, rent-to-own and creative borrower incentives need to become more prevalent to make these loans perform in the long run and to provide a true solution for the homeowner.
Q: How would you assess the servicing industry's use of technology to date? Is the industry well positioned from a software perspective?
Vida: Most of the technology used in servicing today is obsolete and difficult to use. There have been very interesting new innovations in technology, and the number of new systems is definitely increasing. However, it still feels like catch-up, and there are very few solutions out there that are positioned for the "what's next" in servicing.
Some of the necessary technology for the future includes workflow capability that can accommodate the next generation of servicing configurations, such as the bifurcation concept. The servicing industry also needs solutions with a CRM component, true internal workflow, and other analytics to better support processes and identify gaps in the process and/or issues sooner. Other technology advancements need to push more tools – such as self-directed loss mitigation and a system that will improve borrower education – directly to the consumer.
Q: Policy-makers have recently taken an increased interest in the REO disposition methods employed by Fannie Mae, Freddie Mac and the Federal Housing Administration. What do you see as the biggest impediments to effective REO asset management?
Vida: REO management in today's environment has unique challenges. Most of the metrics we have traditionally used to measure success can no longer be used to manage the process. In addition, the process of pushing every asset down the same path has flaws as well. For example, properties on the coast of California cannot be managed and/or measured the same way as a low-balance rural property in the Midwest. The expectations of performance, the workout solutions or alternatives for dispositions all must be redefined. Additional complications to asset management are understanding rental performance and identifying good markets for investors versus homeowners.Â
Q: What are your thoughts on the Federal Housing Finance Agency's proposals for alternative servicing compensation structures? Do you favor one of the proposals?
Vida: The compensation model for servicers is certainly outdated. The structure in place does not align the interests of servicers with those of the owners of the assets and instead incents the servicer to focus on cost of service. Clearly, as a result of the focus on cost of service during the first half of the last decade, the ability for servicers to manage default and loss mitigation became a secondary concern.
The next generation of servicing fee structures is complicated by many factors, including the proposed Basel III Accord, which would limit the amount of mortgage servicing rights that can be counted as Tier I capital.
What will be critical in the future is that the new structure clearly aligns the interests of the servicer with those of the at-risk parties. The structure should be simple to administrate, provide the right level of incentives or penalties for performance, and provide the servicer with the right amount of compensation to truly provide service to the consumers.
There are many competing priorities, and it is not as simple as paying less for performing servicing and creating reserves for special servicing. This does not incent the performing servicer to provide excellent service, nor provide any latitude for preemptive loss mitigation or special servicing in advance. In addition, the proposed reserves and other mechanics appear to be potentially cumbersome to administer.Â
Servicer compensation and traditional thinking around compensating balances, fees, advance obligations and timeline management must be redefined. Squeezing the servicer is not the right approach. Rather, creating new metrics for servicers, and measuring performance and paying for excellence, are better approaches to thinking about how to distribute servicing fees and excess servicing spreads.