PERSON OF THE WEEK: Default servicing is an important yet very distinct segment within the mortgage servicing industry. On the surface, its purpose seems clear and simple: Get loans that have gone into delinquency re-performing as quickly as possible.
But how that is achieved is filled with complexity and nuance; there are so many variables including the loan type, loan age and other pertinent loan details; the borrower’s payment history; the processes and technology being used; the regulations that come into play; the frequency and type of borrower outreach and communications; and, in the case of servicing transfers, knowing where the last servicer left off.
In essence, it is the default servicer’s job to learn everything they can about the borrower and their habits – in addition to all the relevant data connected with the loan.
Technology has played a huge role in helping default servicers get loans back on track and mitigate losses for their clients. Data, analytics and reporting have come a long way in the last few years – and in many respects, the processes, procedures and regulatory compliance are better and smoother than they ever have been. But, due to the inherent complexity of the job, default servicers continue to face challenges in improving the efficiency of their operations. To learn more, MortgageOrb recently interviewed Matt Stadler, president of Velocity Servicing, a division of LoanCare focused on distressed loans.
Q: Can you provide an overview of the special servicing default industry and its role within the broader mortgage servicing landscape?
Stadler: Traditional mortgage servicing is a scaled operation that depends on efficiencies. It’s a homogenous type of business that is largely performance-driven – meaning that you’re taking and making payments and sending disclosures. Its operation relies on large-scale call centers dedicated to providing customer service and question resolution.
While default is a part of traditional servicing, special servicing is a sub-niche that is dedicated to a more intensive focus on the default cycle. It is particularly centered around buyers of nonperforming loans, re-performing loans, or any other loans where the investor or owner assumes the credit risk, so they are sensitive to both the frequency and severity of losses that might be incurred within the default space.
Special servicing provides escalated service level metrics, and account level and portfolio level ownership, all pointed towards getting nonperforming, credit-sensitive assets performing. Therefore, all the effort, analytics, metrics, triggers, and events that might dictate when to interject, all coalesce around getting loans that are delinquent re-performing as quickly as possible so that we can ultimately reduce the frequency and severity of default.
Q: What are some of the key challenges that subservicers typically face when managing loans in default?
Stadler: Default loans are unique. They require precise timing around when a servicer intervenes and communicates. As the default cycle progresses, the options that are available become fewer and fewer. It also becomes increasingly difficult for an investor to take a loss and provide a resolution that’s beneficial to the borrower. So, speed is of the essence. And while traditional servicers might not be set up to effectively handle default loans, special servicers are – through a loan-level, portfolio-driven ownership model.
That model, coupled with an intense analytical framework, enables a special servicer to identify, in a timelier fashion, both the relevant events that drive that progression or resolution as well as the abilities of certain outcomes. It’s a balancing act between loan volume and employee capacity to ensure these non-performing loans are handled with the care they need to re-perform quickly.
It’s important to have an analytical framework that can augment the high touch/low loans per employee structure to better identify the event triggers that indicate either a propensity to default or an ability to re-perform. And then, with the necessary speed, get that information to the borrower so you can help them expeditiously.
Q: What strategies and best practices do special servicers employ to assist borrowers in default and help them avoid foreclosure?
Stadler: Typically, special servicers are acting on behalf of a mortgagor who owns the credit risk and is sensitive to both the frequency and severity of the default outcomes. They want to minimize how often default happens, the pain when it does occur, and ultimately speed up the resolution that might prevent a loss.
Special servicing is about consistent and persistent follow-up of a singular, simple message: the mortgagor has solutions. The investor wants a resolution just as much as the borrower and it’s an issue of education and salesmanship. To do both, you must get in front of the borrower to effectively communicate what those options are and be willing to shepherd the borrower through a process that can be laborious and daunting. It comes down to simply communicating in a way that deescalates the downside and incentivizes the realization that there is a way out.
Q: How does the subservicing default industry collaborate with lenders and servicers to ensure a seamless transition when loans enter default status?
Stadler: Often, loans come to a special servicer because they’ve entered some trigger status of default, whether that’s 90 days delinquent, 120 days, etc. The status of the loan or the changing of the loan owner (nonperforming loan sales) is what starts the relationship.
What’s most critical is the onboarding process initially — understanding where the prior servicer left off and where the new special servicer picks up. Knowing the borrower’s payment history and prior loss mitigation experience, both successful and unsuccessful, can provide tremendous insight into his or her proclivity to re-engage with new solutions. Oftentimes investors purchasing loans with these characteristics perform extensive due diligence to understand exactly that. Extensive due diligence also provides color and clarity at loan purchase to yield pricing and discount levels. Coincidentally, this same information provides all the necessary context for both the likely type of outcome and the proclivity of the borrower to pursue certain options.
Q: What role do technology and analytics play in optimizing default servicing processes, and what innovations have been introduced to improve efficiency and borrower experience?
Stadler: Undoubtedly, the right analytical framework can absolutely be the catalyst for true performance lift. Without an integrated network of analytics, special servicers would be basing their actions solely on whether a borrower has made a payment or called in asking for help.
Having a system of intelligence that augments that fundamental information with more advanced behavioral indications, triggers, and operational alerts, can allow a special servicer to interject the right information at the right time to produce the optimal outcome as early in the process as possible. Saving four to five months in the overall process reduces borrower strain by eliminating unnecessary swirl, associated advances, and likely disengagement by the borrower. All of this culminates in more deals, more quickly, creating outcomes with reduced severity and an increased probability of success.
Q: What trends do you foresee shaping the industry’s future?
Stadler: Obviously, advances in AI, particularly in true OCR, coupled with behavioral data mining, could further supplement the analytical infrastructure that currently upholds special servicing. Time will tell how effectively this type of technology can be implemented to scale, without introducing any additional regulatory, compliance, and reputational risk into an already overburdened system.
In the meantime, any technology that can improve the ability of a servicer to push and pull quality content to and from borrowers in distress will be key.