Special servicers have gone through a lot of changes during the past few years. For one, they had to deal with a deluge of new regulations, including the Consumer Financial Protection Bureau’s (CFPB) mortgage servicing rules that took effect in January 2014, as well as new requirements specifically related to capital reserves, mortgage servicing rights (MSR) transfers, marketing services agreements, third-party oversight, autodialing, and the list goes on. In addition, many special servicers have decided to branch out into new lines of business due to the fact that delinquencies and foreclosures have now almost returned to pre-crisis levels. Adding to the complexity special servicers face is the recent increased volume in whole loan sales and MSR transfers, including the recent nonperforming loan (NPL) sales from government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

To learn more about how all of these changes are impacting the special servicing segment, Servicing Management recently interviewed Kevin Kanouff, president and CEO of Statebridge Co., which is among the few remaining special servicers that have had to reinvent themselves in order to continue growing in this highly complex new environment.

SM: An awful lot has happened in the special servicing segment during the past couple of years - not the least of which is the massive drop-off in delinquencies and foreclosures, which is the bread and butter of the segment. Is it safe to say that most, if not all, special servicers have had to reevaluate their businesses during the past year or so?

Kanouff: Absolutely. And that has applied to Statebridge, as well. It was about two years ago that we started telling ourselves, “Now is the time to start evaluating our future.” It was around then that we started asking ourselves, “What do we want to do? Who do we want to be?”

Since our inception, we have been a special servicer focused on the really hairy NPL loan pools. And it’s been a great business. But, we knew we needed to do more.

It was around that time that I hired our president and chief operating officer, Jay Memmott, who ran Wilshire Credit Corp. and Seterus for a long time. He had finished his contract with IBM and was going to retire, but we reached out to him and [offered him a position].

We decided we wanted to do two things moving forward. We love the special servicing business. It’s a business that makes money on its own, and we want to do that for the indefinite future. We see the long-range trends there as being beneficial for a firm like Statebridge. First, special servicing is hard to do. And, there’s always going to be a need for people who want to do that world and who are good at it. We think there will always be a need for that because you’ll never completely get rid of delinquencies. The industry is making loans today that will default later. Second, the big banks do not want to service NPLs. If you look at [JP Morgan Chase CEO] Jamie Dimon’s letter to shareholders [in April], he’s saying they don’t want to service [delinquent] loans because it is not their core competency. We think the big institutions want people like us around to take these loans on a flow- or bulk-servicing basis. Third, there’s been a lot of consolidation in the special servicing industry. There are companies that have gone out of business or become captive. We’re one of the last remaining special servicers. That’s part of the reason why we like this business going forward.


But, we decided that we also wanted to build out a performing factory. It has more of an agency focus - but it uses a lot of the same infrastructure that we use for our NPL pools.

In order to service NPL pools, a servicer must have a complete loan administration and compliance infrastructure. You need the full suite of servicing capabilities. So as a special servicer, you can say, “I’ve built out my platform that can do special servicing - why not [use that] to build out another factory that focuses on agency or performing servicing?”

So, over the last year and a half, we built our performing factory - in fact, we just opened an office in Portland, Ore. - and the company has since tripled in size. In fact, we’ve experienced sustained organic growth for about the last two years.

SM: With the Fannie and Freddie NPL sales and other whole loan deals going on, is there any opportunity for big-box servicers to get in on - or back in on - the default servicing space? Or is it more likely that we’ll see special servicers retain their NPLs and layer performing servicing over their existing businesses?

Kanouff: It’s the latter, for a couple reasons. One, there are fewer performing loans out there. So, if you’re one of the big banks, you would never consider getting into the special servicing business now because you’d be looking to get into a niche segment that is contracting, plus you’d be going up against these guys who are entrenched, who are really good at it. I would think you would stick to your knitting, if you were a big box.

Servicing NPLs is hard, whereas servicing performing loans is really all about scale and having a culture of compliance and control. It’s also about the importance of having a strong relationship with your investor clients - which is an area where most special servicers have excelled.

SM: What’s your take on the overall effectiveness of the CFPB’s servicing rules, now that we are two years out? I don’t expect you to comment on all nine rules in the set - just the ones that pertain to borrower outreach and default management.

Kanouff: I think we did an interview with your publication just a couple months before the rules went live, and, at the time, we said we were doing 80% of all of those rules - including single point of contact - already. The CFPB really drafted those rules to mirror special servicing. From the [borrower outreach and early intervention] standpoint, the rules haven’t been that bad.

But the bad side of the CFPB rules is this: I’ll have conversations with other servicers, and they’ll tell me that they’ve just had a [CFPB] audit, and they’ll say, “Here is something to look for.” And they’ll mention a finding that occurred on one of the audits - and we’ll go look and say, “Wow, that isn’t in the rule.” And, we wouldn’t necessarily have known that that was the path that was taken had we not spoken with another servicer. So, I think it’s tough for us to anticipate some of the regulatory directions that they give.

I think anyone in the mortgage industry will tell you, we can do compliance - we have big compliance teams, we have technology, and we can change policies and procedures to adhere to new directives. Because that’s what our [investor] clients do - they will change the way they want us to service a loan on the fly. And as a special servicer, that’s part of the service we provide.

So, when it comes to the CFPB, and compliance, we can do almost anything that we’re told to do. But, we need to know about it. And I think anyone would say that that is fair. Let us know what you want - and we’ll do it. And unfortunately, that’s the bad that we’re seeing out there.

SM: What about the CFPB’s guidelines regarding MSR transfers? The velocity of MSR transfers and whole loans sales is picking up lately - do you think the industry is addressing the bureau’s concerns in this area? How far along do you think things have come in that area, technology wise?

Kanouff: When we are involved in transfers, whether they are MSRs or whole loan sales, there is a heightened awareness regarding quality control and in-flight loss mitigation, including in-flight discussions with distressed borrowers. It’s a huge issue for the industry. I think we’re much better at it than we were.

With all due respect, regarding your assumption that there are more loan transfers going on now than there were - I’m not sure that’s really true. Think about how many times loans were transferred during the 2000-to-2005 period, when the securitization machine was fully ramped up. Loans were transferred five, six, seven times before they were finally thrown into a securitization. The difference today is that there are more NPLs being transferred … so that’s where the difficulty is, and that’s why it seems like there are more transfers. It’s really just that they are getting more attention.

SM: Would you agree that technology has played a central role in getting all of the bugs out of the MSR transfer process? Would you say that servicers have nearly perfected the process at this point?

Kanouff: Today, the loan transfer process is so sophisticated. Three years ago, a seller would throw a [computer] tape with Excel files on it, and the loan docs, over the wall and say, “Here you go, good luck, if there’s missing data or missing docs, too bad, deal with it.” Today, sellers are providing multiple data sets - multiple images of documents - and if there’s missing documents, they get chased down. It’s like night and day.

Also, I think the sellers are realizing that the CFPB is going to hold them accountable if they don’t provide the buyer and servicer with the requisite data they need to service the loans correctly. It’s kind of an interesting anecdote, but we go through almost as many audits from a counterparty perspective from people who are selling to our investor clients than we do from our own clients.

So, if a big bank is selling a pool of loans to one of my clients, that big bank is going to send a team of people to my offices to audit us, to make sure we have our act together enough, as a counterparty, so that the borrowers who they are no longer going to have a relationship with are treated well. You wouldn’t believe it, but they send in teams for a week at a time to make sure we’re a good enough servicer to service the loans that they are selling.

SM: What about big data? There’s been a lot of talk about big data’s potential role in forecasting trends and driving actionable insights in servicing - is that something that you’re seeing? Also, what can you say about automation at this point?

Kanouff: Well, I can say this much: We took all of our databases and migrated them to a data warehouse environment where our folks can, almost with the click of a mouse, generate any number of reports - regression analysis, exception reports, you name it - to help us service better.

Here’s a great example of how that is helping us: We recently saw a large spike in delinquencies in a loan pool that we had acquired - and we were trying to figure out why. So, we ran some data queries, and we figured out two things. One was that this loan pool came over to us in January, month end - and it came on a weekend. So, what happened was, the borrowers had paid on time, but we had closed the books and recorded those payments after the cut off for our reporting for the month - so it was a false spike.

Another thing is, we [used to] call borrowers if they hadn’t paid five days after their due dates. And one of our managers recently asked, “Hey, are we wasting our time and resources calling these people?” So we did some analysis, and we figured out that a high percentage of those people paid every month between day five and day 10. So, we decided to just stop calling those people who always ended up paying between day five and day 10 - and we used those calling assets for other accounts. And it worked - because you know what? There are some people who will always pay between day five and day 10. That’s another good example of how data and analytics are helping us make better decisions and find new efficiencies.

With regard to automation, we are doing it a lot in the performing factory. We have a big push, internally, to deliver self-help … We see that not only millennials, but also Gen-Xers and even baby boomers love self-help. Even my dad, who is a baby boomer, loves self-help - he wants to get online and run an escrow analysis, or maybe he wants a pay-off report. He wants all of his questions answered on a self-help basis.

The other thing is to go mobile. We want both of those things to be really robust in the near term.

SM: What impact do you think rising rates will have on servicing?

Kanouff: The answer I am going to give you might not be the one you’d expect - because it’s not the obvious answer. We hold a lot of cash as a servicer. And that, historically, has been a huge part of servicing compensation - the float. We have basically never experienced any float income in the entire history of our company because rates have been so low. So, if [short-term rates] ever went up - so that our deposits actually made money, instead of getting credits, which is what we have now - then that would be an income stream for us, so we would be all for it.

The more obvious response is that rising interest rates lead to fewer refis - so, you have less churn in your book, which is always a good thing for servicers and holders of MSRs.

To be honest, I don’t think we’re ever going to see an interest rate environment for mortgages that is going to differ materially from where we are now - I mean, [the Fed] raised rates 25 basis points, and mortgage rates went down.

SM: What do you think we’ll see in terms of consolidation for the remainder of 2016 and into 2017?

Kanouff: I would be surprised if we saw any more deals for the rest of the year. A couple of servicers recently went out on the market - and they just didn’t get the numbers they were looking for - and so they said, “Well, let’s just keep running the business.”

SM: Do you get the feeling that some of the regulatory dust is starting to settle for servicers?

Kanouff: We’re seeing a slowdown in new regulations coming out - so, I think we’re in a digestion period. And we’re not expecting much more - at least, not as of right now. So, yeah, I think a lot of servicers are settling in and trying to determine if they can make money in this new environment.

SM: Finally, what’s your take on the new capital and liquidity requirements issued by the GSEs and Ginnie Mae for non-banks - as well as the recent proposal by the Conference of State Bank Supervisors to increase non-bank servicers’ net worth to at least $2.5 million?

Kanouff: The new capital and liquidity requirements are too rigid. They will make it even harder for smaller servicers to break into the market, and from what I hear, the GSEs and regulators are interested in more choice for servicing. The Federal Housing Finance Agency rules say that there is discretion with the GSEs on applying the tests, but I fear that they are really seeing them as hard and fast and not open to discretion.

Again, our tangible net worth is well above this, so I am not concerned about its application. But again, I think this will stifle competition in the industry by creating another barrier to entry. Good for us, but bad for investors? Perhaps.

Loan Administration

Kevin Kanouff: Special Servicers Must Reinvent To Survive In The New Environment

By Patrick Barnard

With delinquencies and foreclosures receding to pre-crisis levels, special servicers are casting their eyes toward the performing market.




































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