REQUIRED READING: Vendors Help Servicers Persevere Through Volume Spikes

ken into its simplest form, default outsourcing is fairly[/b] straightforward: A loan goes into default, and its servicer – for reasons ranging from a desire to lower costs to a lack of specific jurisdictional expertise – chooses to shop out to vendors certain functions relating to bankruptcy, foreclosure and/or real estate owned properties (REOs). While its definition hasn't changed (at least not technically), the business of default outsourcing has mutated. Traditional default outsourcing continues to exist, which is evident in the high foreclosure rates. But, as was the case when [b][i]Servicing Management[/i][/b] examined the topic last year, default outsourcing is increasingly including more loss mitigation work. The players included under the default outsourcing umbrella have expanded to include not only attorneys and Realtors – whose expertise with municipality-level ordinances and timelines is crucial for shops that service loans across state lines – but also players that are more conventionally categorized as loss mit service providers (e.g., door knockers, counselors, call center operations). "Our work follows the flow of where the volume is, and nowadays, that's the loss mitigation space," says Jason Nadeau, group president at Stewart Lender Services. He heads the company's loss mitigation, foreclosure/bankruptcy and REO groups. "Right now, the services most heavily in demand from our customers – and what we're doing the most of – is home retention work." This should not come as much of a surprise, especially given the federal government's Homeowner Affordability and Stabilization Plan announced in February, which led the way for the Making Home Affordable program (MHA). The focus for all players has shifted to finding ways to keep borrowers in their homes, and that effort includes a multifaceted plan of attack. Stewart is not the only bundled-service provider that has seen a shift in its operational focus. "The most meaningful change for us has been a refocusing on technology and loss mitigation solutions versus traditional default outsourcing work," notes Scott Brinkley, executive vice president of First American's Outsourcing and Technology division, whose purview extends to claims, REO, foreclosure and document preparation, among other areas. "I think clients working with high volumes are still looking for third-party solutions to support them, but we've strategically shifted to an arena where we're technology-centric in the way we approach the solutions," he adds. But where do attorneys fit into this equation? Servicers that have arrangements with law firms to perform foreclosure-related tasks are leaning on their attorney partners more than ever to do pre-foreclosure work, according to Fitch analyst Diane Pendley. "It's one more effort before the actual legal proceedings, so the attorney is not acting as a foreclosure attorney at that point," she observes. Rick Smith, CEO of boutique shop Marix Servicing LLC, frames loss mitigation's far-ranging scope in a different way. "Loss mit owns everything in this shop," he says. "Everything else is a subset of loss mit that works the loans that loss mit's not pulling into its grasp." So if loss mitigation's gravitational pull is such, is its place in a discussion about default outsourcing ill-fitting? The conversation is not one of mere semantics; investors certainly draw a distinction between default and imminent default. But today, default outsourcing has taken on an amorphous quality, and to leave out loss mitigation and all that it entails would be shortsighted. [b][i]Clarifying the tasks[/i][/b] A universally accepted school of thought in servicing is that no-contact borrowers will more than likely wind up in foreclosure. But with all the media attention paid to MHA plan in recent months, the problem of no-contact borrowers appears to be slowly dissolving. Instead, servicers are inundated with inbound calls and inquiries about eligibility for refinancing or loan modifications. Additionally, government programs clarify that it is a servicer's responsibility to notify borrowers of their options. This change has had an undeniable impact on the vendor community. "I've heard recently that no-contact counts are down," says Jay Loeb, vice president of strategic development for National Creditors Connection Inc. (NCCI). Until a couple years ago, NCCI's services were geared almost entirely toward no-contact borrowers, and the company's largest clients were those working subprime portfolios. The company has not seen firsthand a decrease in no-contact borrowers, "but more at-risk borrowers than ever are calling back to the servicer to try to get help," Loeb says, adding that NCCI is handling more borrower engagement of this variety. The situation is similar at Titanium Solutions, where employees help manage the loss mitigation process by collecting documents from borrowers, prequalifying borrowers and returning documents. "With the addition of imminent-default options and an ever-increasing number of current customers calling their servicers for potential relief, servicers are having difficulty predicting response volumes, which is resulting in a strain on service levels," notes Patrick Carey, CEO of Titanium Solution's holding company, Titanium Holdings. "As such, we are asked to assist with not only delinquent, or high-risk customers, but also with current customers." MHA is a document-sensitive, labor-intensive program, and servicers are feeling the political pressure to comply. But for all its perceived faults, the program does accomplish one very important goal: It provides a sense of structure and uniformity. "What [MHA] has done is it has indicated some steps that need to be taken – which is very good for servicers, because it gives them a clearer path should they decide to follow that guideline," Fitch's Pendley says. "It is possible [servicers] will be able to outsource some of the more defined tasks. When you don't know what's going to need to be done, it's harder to build a parameter around obtaining a vendor that can do that work for you." MHA's arrival, of course, came after a proliferation of government programs that did more to muddy the picture than clarify it. "What we saw as a result were a lot of servicers that were entrenched in the face of uncertainty about legal liability about loss mitigation for loans that were in private [mortgage-backed securities]," says Denis Brosnan, CEO of Prommis Solutions, a business process outsourcer. "They didn't refer anything out until there was more clarity." Brinkley estimates that 80% of First American's inquiries are now driven by servicers' desire to work with the government's program. Some of the larger shops have the capability to adjust to MHA's guidelines, but in general terms, "everyone has scrambled to comply." "I think that the government intervention, whether the [government-sponsored enterprises'] approach or any other, enabled a framework for servicers and service providers to work in high-volume environments," he says, adding that servicers have done a "stand-up job" in recognizing that they are being judged by the court of public opinion. The way Stewart's Nadeau sees it, shops are breaking loss mitigation work into two camps: flow- and campaign-based transactions. In the former, he explains, a defaulted loan lands in front of a servicer and is determined to be in need of assistance. From there, the loan follows the traditional loss mitigation path that is complemented by new MHA opportunities. But with campaign-based work, a shop runs analytics and determines a group of loans that are eligible for MHA modifications or refis. Nadeau says Stewart's customers are staffing and managing toward the flow business, handing his company the campaign-based work. Volume spikes over the past few quarters have been too inconsistent for servicers to staff to an acceptable service level, he adds. By handing off campaign-based work, "they're able to maintain a consistent staffing level and not add 100 people and then let 100 people go," he says. The stop-and-go nature of servicing over the past year, accompanied by moratoria initiated by the GSEs, states and banks, has dramatically affected the way that both shops and vendors have approached staffing. Brosnan says President Obama's plan is "one of the few things that has brought clarity to the market," which is good news for all. "The bad news is, it's been such a seizure that it's going to take servicers a while to retool and ramp back