REQUIRED READING: Gene Ross has one word of advice for anyone considering a move into the subservicing sector: ‘Don't!’
‘Companies coming into the subservicing sector need to have their heads examined,’ says Ross, president of LoanCare Servicing Center, based in Virginia Beach, Va. ‘It is a complicated sector, and it is getting more complicated.’
Indeed, the subservicing sector has seen a considerable level of challenge, including the residue from problems bedeviling the servicing segment of the industry.
‘Anything impacting servicers will most definitely impact subservicers,’ continues Ross. ‘Unless you are dealing outside of the government-sponsored enterprises (GSEs) and deal with the private-sector portfolios – but that is more of an exception than a rule for subservicers.’
Steve Horne, president of Carrollton, Texas-based Wingspan Portfolio Advisors LLC, concurs, noting that the most pronounced problem facing servicers – the robo-signing controversy – is not making life easier for many subservicers.
‘The full ramifications have not been felt,’ Horne says. ‘Robo-signing has been an extremely convenient tool for those with an ax to grind against servicing: the investor class, the borrowers, the state attorneys general, regulators and, most ominously, the class-action attorneys.’
However, many subservicers look at the robo-servicing controversy from a safe distance.
‘This is mostly a Big Four issue,’ says Gagan Sharma, president and CEO of BSI Financial in Irving, Texas. ‘It is less of a problem for smaller subservicers like us – we don't have an assembly line with thousands of loans being signed per day.’
But that's not to say that subservicers are operating without difficulties. Subservicers focusing on the reverse-mortgage market are finding themselves in a very tight niche.
‘The reverse side changed rather dramatically when Fannie Mae exited the business,’ says John LaRose, CEO of Lansing, Mich.-based Celink. ‘With reverse mortgages, either you subservice for a Ginnie Mae issuer or you are a Ginnie Mae issuer. If we were not aligned with a Ginnie Mae issuer, we would not be in business.’
‘Until we get an active secondary market, it will be very slow for any subservicing movement,’ says Marc Helm, president and chief operating officer for Reverse Mortgage Solutions Inc., based in Spring, Texas. ‘The only viable subservicing market is the Ginnie Mae loans.’
Yet Helm doesn't see the glass as half-empty, despite the problems facing the reverse-mortgage market. ‘We're heavy in the community bank and credit union markets,’ he adds. ‘They portfolio their loans, so we will pick up subservicing from them.’
Many subservicers believe that despite the dramatic changes in the industry, there are still new opportunities to pursue.
‘A number of mortgage companies and banks and credit unions are now retaining their servicing, but they don't necessarily have systems or personnel to properly service the accounts,’ says David Miner, executive vice president at Sudbury, Mass.-based Graystone Solutions. ‘As they get into loans with the GSEs, prepare to manage escrow accounts and move into other new areas, they are looking to outsource.’
Rick Seehausen, president of LenderLive, based in Glendale, Colo., believes that the industry's shifting paradigm could signal a new chapter in subservicing.
‘Subservicing is going to grow,’ says Seehausen. ‘We've seen a lot of consolidation in the servicing area – big companies with big portfolios that have, as a result of consolidation, a big problem. On the origination side, regulatory changes and the complexity around the origination business are perfect for the service providers who are leveraged for both the technology and the capacity standpoint to alleviate pressure on the industry.’
Profits from problems
One area that could easily fuel the sector's expansion is the handling of distressed assets.
‘The default side is very active,’ says Anil Raibagi, CEO of Wipro Gallagher Solutions Inc., headquartered in Franklin, Tenn. ‘Banks are carving out parts of their portfolios that require special attention because of delinquencies. This is a welcome change for subservicers, because they see new business.’
‘There is a fair amount of private capital ready to acquire these assets,’ says Sharma. ‘For those investors, foreclosure is not a four-letter word.’
‘If you don't have a strong default department, you are in for a tough road,’ advises Kevin Quinn, vice president of strategic partnership at Phoenix-based Marix Servicing. ‘Subservicing must be willing to accommodate the needs of clients in terms of default servicing. All questions today are going to be centered around what the subservicers can do to demonstrate their value in default servicing.’
But subservicing distressed assets is becoming more problematic, according to Scott Conradson, president of the Tampa, Fla.-based Quantum Servicing subsidiary of Clayton Holdings LLC.
‘From the borrowers' perspective, there is an increasing sense of entitlement,’ he says. ‘People think they are entitled to a modification – they have a sense of 'you owe me this.' Borrowers are much more savvy today, and trial lawyers were soliciting them even before robo-signing – and that pours gasoline on the fire. Then, there is the process of dealing with delinquencies. Costs are increasing because additional moratoriums and roadblocks are in place, and some states may take four to six months to get mediation scheduled."
But subservicing distressed assets – and healthier assets, for that matter – carries a heavier price tag today. Ross states that the issue of margin compression will have a significant impact on the sector's viability.
‘Costs are clearly going to rise,’ he says. ‘We have state and federal compliance requirements to adhere to, and the additional need for people to meet the high level of competition.’
‘The Dodd-Frank Act has increased the cost of doing business,’ says Sharma. ‘Staying up to date gets more expensive, and we need to pass this on to our clients – who pass it on to the consumers.’
Sharma adds that state regulatory requirements are also a major concern, particularly since there is a ragged uniformity in what the states are requesting. He notes that the concept of a national servicing standard might bring consistency to – and, by extension, bring down costs for – the challenged sector.
‘It would be nice if a national servicing standard replaces the current state-by-state patchwork we have,’ he says. ‘A challenge for us as a subservicer is dealing with constant changes. If someone said, 'Here, we have a standard and everyone follows this,' we could deal with that.’
