REQUIRED READING: Servicers' investments in default servicing technology are largely being driven by the complex investor and regulatory requirements that are hitting shops from every conceivable angle, according to vendors in the space. Although a select few core servicing platforms continue to dominate the marketplace, servicers' options expand considerably when discussion of new technology deployment turns to the world of default management.
The complementary portals and modules that wrap around shops' systems of record help servicers in innumerable ways. From ordering and tracking property valuations or inspections, to navigating end users through the labyrinth of loss mitigation steps, to communicating with investors and outsource partners, default servicing technology affords servicers the chance to automate manual processes, improve workflow and gain efficiencies.
But while in the past servicers may have opted to use their internal IT resources to develop their default systems, the trend appears to be increasingly shifting toward a purchase model involving third-party providers. As the number of defaults has increased, so has the number of vendors in the field. Product sophistication has grown by leaps and bounds, according to Craig Lindauer, executive vice president of operations at AMS Servicing, a subsidiary of Arbor Residential Mortgage LLC, an Arbor Commercial Mortgage company.
"Five years ago, I would have said there's no way we'd be able to buy something off the shelf that's going to be as robust as what we can create internally, because it was such a niche field out there," says Lindauer, who currently uses a Lender Processing Services (LPS) suite of products to take care of all loan administration and default functions in his shop, except for real estate owned disposition.
When it comes to technology, a long-standing concern for low- and medium-volume servicers wrestling with nonperforming loans has been the almighty price point. Mega-shops have both the bandwidth to build systems internally and the capital to buy end-to-end systems, making the build-versus-buy decision far less restrictive. Smaller shops like AMS, a special servicer, may service highly delinquent portfolios, but risk being priced out of the market because their overall volumes are relatively low.
There are many other factors servicers must consider when looking at technology upgrades. With federal and state regulations changing at a breakneck pace, servicers have limited time to devote to deploying new systems and working out any associated kinks, making time to market a pivotal concern. Moreover, with a dizzying array of judicial requirements to keep in mind, servicers rely on their default systems to empower line staff to make the correct choices pertaining to file referrals, borrower correspondence and due-diligence documentation.
Beyond that, default systems must be highly configurable and able to communicate with any number of vendors or investors. Configurability aids servicers that are working on behalf of more than one investor, allowing them to tweak calculators and deadlines to meet individual investor guidelines. Given the mix-and-match nature in which servicers often equip their shops, using disparate platforms and working with a variety of service providers, servicers demand highly flexible architectures and interface capabilities. Each of these elements plays into the total cost of ownership.
"Dollar-wise, we could have saved significantly had we gone with some of the smaller playersâ�¦but almost everything has to be built in terms of interfaces," says Lindauer, who says LPS' interface capability is "very strong." LPS' pricing options were also more favorable to a small shop like Lindauer's than he had initially expected. "It's not as astronomical as I thought it'd be,’ he notes. ‘You get a lot of horsepower for a little shop at a fairly reasonable price."
The lone drawback to the LPS suite, from Lindauer's perspective, is its accounting functionality, which Lindauer, nonetheless, calls one of the best systems of its kind in the industry. Its structure does not bend easily to the specific fees that special servicers charge clients, he says. Nonstandard servicing fees that are somewhat common in the special-servicing world (e.g., reperformance fees, incentive fees) can prove troublesome.
"If it's not a strict dollar amount per loan per month, or it's not a percentage of the payment coming in, it doesn't handle it very well," Lindauer says.
AMS services a small but colorful portfolio that includes a wide assortment of subprime products. At the time this article was written, the company was servicing about 4,000 assets. As a special servicer, AMS churns over its portfolio quickly, typically working a loan for between six months and one year.
On the other end of the low-volume spectrum is Spokane, Wash.-based Numerica Credit Union. Although Numerica's portfolio is far less exotic than AMS' – the credit union's portfolio loans, all of which are conventional products, total fewer than 2,000 – Numerica recently deployed new default technology, according to loan servicing manager Linda Lee Kershner. Numerica's decision to build out its technology was based on the reporting requirements involved with modifying Fannie Mae loans through the Home Affordable Modification Program (HAMP).
Kershner says her core platform, FICS' Mortgage Servicer, while generally a good fit for credit unions, did not support any of her HAMP reporting. As a result, the Treasury Department was rejecting many modifications that Numerica had submitted for approval. After consulting with other credit union servicers, Kershner landed on Byte Software's BytePro modification edition, implementing the system earlier this year. BytePro met Numercia's criteria of what the credit union could manage in-house.
"I can manage getting in the information, but I didn't have the staffing in order to analyze all of the information without having some type of system – and BytePro came through for us," she says. By comparison, Kershner uses a simpler spreadsheet method when modifying portfolio loans to a 31% debt-to-income ratio.
"You can do a spreadsheet and quickly get somebody approved that you know would be approved for HAMP by running the numbers, but that's not the way that Treasury wants to see it," she adds. "They want to see it on their spreadsheet with the 26 units of information exactly the way they want it."
BytePro has helped to alleviate the pain, Kershner says.
"Now we know before we even send [a loan] where our errors might be, so they're not rejected," she says. "That was important, because before, we didn't know enough. We weren't all prepared for HAMP."
Servicers have less opportunity than ever before to digest the many new policies with which they must contend. As has been well documented, the Treasury revised its guidance on HAMP particulars dozens of times last year alone, as the federal modification program and its administrators were working through growing pains. This reality has made it difficult for servicers to revamp their technologies, calculators and workflows in a timely fashion.
"The historical concept of planning things weeks and months ahead and getting them done at their own pace is no longer relevant today," says Sanjeev Dahiwadkar, president and CEO of IndiSoft LLC, the Columbia, Md.-based provider of the RxOffice Platform. "That is the big challenge stakeholders are facing."
IndiSoft's RxOffice case management system has applications throughout the loan life cycle – from loss mitigation to eviction – and the company offers portals that interface with Realtors, insurers and investors. Dahiwadkar says the main technology goals for servicers are reducing both the total cost of ownership and the time to market.
"Servicer shops are not software warehouses," he says, explaining that more servicers are subscribing to a purchase model because capacity constraints cause them to focus on expanding areas of business other than their IT resources. Dahiwadkar emphasizes that changing regulations play a major role in servicers' decisions to upgrade their systems, and he notes the growing number of jurisdictions that are requiring mediation conferences. IndiSoft's home state of Maryland, for example, recently enacted mediation rules. Such programs have a downstream impact on document generation, workflow and data tracking, Dahiwadkar says.
"Not everything is really supported or can be supported in the core system of record," he says. "Our approach is to maximize what servicers have already invested in and fill the gap of what needs to be there."
Lee Howlett, president of ISGN's servicing practice group, similarly observes that while many servicers try to deploy homegrown solutions, some cannot respond quickly enough to the changing dynamics of HAMP and other government programs. Technology providers are increasingly offering software that automatically updates their rules engines in line with investor and government guidelines.
"Every servicer is at a different life cycle in their maturity," Howlett says.
One of the areas where default servicing technology has made its greatest strides is in regard to workflow. According to Patrick Kopins, president of UnitedTech Lender Service Inc.'s (UTLS) technology division, a system with strong workflow not only serves up the next step in a loss mitigation process for an end user to complete, but it also provides the appropriate information and actively brings the user to the next logical step, such as a screen from which he or she can order a valuation or occupancy report.
"Bad workflow instructs the user to do something, leaving the user to find the appropriate screen and information," he says. UTLS offers the BackInTheBlack system, which the company acquired from LandAmerica OneStop last year.
The major appeal of several out-of-the-box workflow management systems, tech providers say, is their ability to allow servicers to hit the ground running, post-implementation. Vendors accomplish this feat by providing best-practice recommendations before a system is deployed. The recommendations are built from a combination of industry experience and publicly available information relating to the government-sponsored enterprises' rules and policies.
The difference between creating a workflow from scratch and adjusting a ready-made workflow is analogous to buying a car, Kopins says. A benefit of the latter approach is a quicker time to market.
"It's the difference between ordering a car off the lot that you can test drive and custom building a car off a pamphlet, waiting three months to get it and saying, "Gee, I don't really like the ride,'" he says, explaining that UTLS offers its best practices to clients and then works with the clients to fine-tune specifics.
Intuitive workflow is also capable of directing files to shops' most appropriate personnel, channeling high-value propositions to highly skilled employees, adds Fred Melgaard, executive vice president of DRI Management Systems. The Newport Beach, Calif.-based firm is set to unveil a new product offering that incorporates Microsoft Visio, a diagramming program. The product, which Melgaard says replaces and expands upon DRI's current offerings, simplifies for system administrators the process of reconfiguring rules.
In researching how other industries use Visio, the company found that deployment time for similar technologies was condensed in cases where the end users were supplied best-practice templates.
"We looked at a number of institutions in other markets that deployed the same technology, and with a model template, deployment times were significantly longer," Melgaard says. "But a number of companies came out with best-practice templates, and those companies were much more successful and had slightly shorter implementation times than with prior products, so that rather than be handed a blank piece of paper, they were handed a draft that they could edit."
There are other notable perks to having a strong workflow, including the ability to capture and track data, vendors say. Servicers that choose to build default functionalities in-house do not always take the data-capture factor into consideration.
"Workflow's wonderful, but if you're not capturing that data along the way, you're really not providing the downstream value in the technology, so you can start to see why it's very difficult to build [technology] from a client's perspective," says Kopins. "If they start focusing on workflow, they have to capture so much information in the process, plus they have to integrate to [LPS' Mortgage Servicing Package] or their system of record."
The ability to track files and loss mitigation outreach efforts is considered crucial, both because it has the potential to eliminate unnecessary costs tied to duplicate report orders and because it helps shield servicers and their attorneys from an increasingly aggressive judiciary system. Melgaard notes the benefits of a system being able to hold images of appraisals, title reports and other documents.
"That's important, because in the chaos that's going on in shops, many companies are double- and triple-ordering things," he says. "Loss mit can't talk to REO; REO can't talk to foreclosure."
Melgaard says DRI found an opportunity for a large-volume client to realize significant cost savings by eliminating the duplicates.
"Even with a small servicer, there's the potential to remove these costs," he says, adding, "Investors won't reimburse you if you double-order something."
ISGN's Howlett says the patchwork of legal requirements across the nation puts servicers at risk of having to endure undesirable court rulings. Servicers are more routinely being tapped by judges to provide evidence of certain due diligence.
"You look at Florida versus Utah versus Arizona, and all of those have very high default rates – and all of them have local rules around what the judges want in bankruptcy or foreclosure actions," Howlett says. "The servicers struggle to document all the efforts they've made on behalf of the consumer before they're granted relief to pursue foreclosure."