REQUIRED READING: Keeping tabs on the subservicing sector is no easy feat. For starters, there is no industry data tied specifically to this sector. And even if there were, it would be an apples to oranges comparison, as some subservicers cover the full gamut of mortgage banking needs, while others focus exclusively on distinctive niches.
‘Subservicing, as a whole, is a very closed society,’ explains Gene Ross, president of LoanCare Servicing Center, based Virginia Beach, Va. ‘It is difficult to say how well everyone performed.’
Yet if conversations with the leading subservicing companies are any indication, 2009 was an extraordinarily good year for the sector. A reprise appears to be in the works for 2010.
‘Last year was the best year in our history,’ adds Ross, whose company was acquired in June 2009 by Fidelity National Financial from LandAmerica. ‘We had our highest revenue and pre-tax income.’
Among subservicers, a number of key factors contributed to the continued growth of the businesses. First, the unprecedented changes that reshaped mortgage banking turned into the need for subservicing support.
‘Overall, 2009 was a pretty exciting year,’ says David Miner, executive vice president with Sudbury, Mass.-based Graystone Solutions. ‘There was a large transition in the mortgage banking arena, as well as a dramatic increase in community banks changing their business models and moving from service-released execution to service-retained execution.’
David Miller, senior vice president of business development at Cenlar, based in Trenton, N.J., concurs on the success enjoyed by subservicers focusing on smaller institutions.
‘Community banks and credit unions, as a whole, did pretty well a from lending standpoint in 2009, and they continue to look at opportunities to create new efficiencies,’ he says.
Miller notes that the collapse of a major company that worked with community banks – Taylor, Bean & Whitaker Mortgage Corp. (TBW) – proved beneficial for Cenlar's bottom line.
‘Where Freddie Mac brought us in as interim subservicers, it contributed to our growth,’ he says in regard to the 260,000 loans in the TBW portfolio that Cenlar subserviced.
But community banks are not the only entities to reconfigure how they operate. Gagan Sharma, president and CEO of BSI Financial in Irving, Texas, notes that originators generally have been actively seeking additional functions.
‘For performing loans, a lot of originators want to return to servicing,’ he explains. ‘Putting servicing on their books helps to bring in franchise business, while lessening their refinancing risk. A lot of originators are going to look at that side of the business – they do not just want to be seen as an originator shop.’
Subservicers are also getting business from beyond the private sector. For John LaRose, CEO of Lansing, Mich.-based Celink, the rough economic climate has seen a more proactive role by state housing finance agencies to keep people in their homes.
‘State housing finance agencies have been a strong market for us,’ he says. ‘People are economically challenged or facing foreclosure before the meltdown. These agencies have stepped up in a big way to help people prevent foreclosures. One of our largest clients in that area has been the Minnesota State Housing Finance Agency.’
With an increased need for subservicers, it should not be unexpected that competition for business is becoming more aggressive. Jeremy Pomerantz, senior vice president with Nationwide Title Clearing, based in Palm Harbor, Fla., points out that more subservicers are being tested to see if they can provide the depth and scope of required support.
‘There are more trials in place to see if subservicers can do well,’ he says. ‘Servicers are looking for professionalism in handling their target portfolio of nonperforming loans. They want subservicers managing modifications and loss mitigation, as well. We're seeing some subservicers lose out on trial – they thought they would get a large portfolio, but that wound up going elsewhere.’
Pomerantz predicts that any subservicer that specializes in modifications and loss mitigation will enjoy bottom-line success. ‘If they can do that adequately, they will see a growth,’ he predicts.
Even more valuable, Pomerantz says, is staying abreast of all regulatory changes that impact the mortgage banking industry.
‘When someone contracts subservicers, it is not for just traditional operational expertise,’ he says. ‘They want subservicers to help them stay in compliance with state and federal requirements and changes that take place. When the Home Affordable Modification Program (HAMP) came out, we had to support all of our clients' decisions and help them re-engineer their business to support these various decisions.’
Miller echoes the observation, noting that his company found itself in an identical situation.
‘A number of companies came to us because they weren't prepared for HAMP,’ he recalls. ‘Their systems were not in a position to do proper reporting. We helped folks with that process; we try to stay very close to outside third parties trying to gather information on HAMP and got an early knowledge in order to build systems around that.’
Miner points out that the changes to the Real Estate Settlement Procedures Act (RESPA) are having a profound impact on how and why originators seek out subservicers.
‘There is a lot of interest in where expenses are going, with originators taking a hard look at the servicing side,’ he says. ‘In the past, origination was the primary focus. With that downturn, they are going to look at how service and ask if it can be better. But the institutions may not have software or personnel to handle such things as escrow. This opens up an avenue for subservicing opportunities.’
Sharma stresses that subservicers have to look beyond the Beltway to be fully prepared for regulatory changes. ‘Some states have passed several new regulations on foreclosure-prevention activities,’ he says. ‘Many more states now require servicers to be licensed. We need to stay consistently up to date.’
On the horizon
Looking forward, subservicers aren't expecting a slowdown on any front. ‘We are going to see lots of foreclosure preventative activities,’ says Sharma. ‘Modification-driven strategies are not working.’
The death of the subprime market will spur an increased need for subservicing from agencies dealing in affordable housing, according to Tim O'Malley, senior vice president of sales and marketing at Baltimore-based Amerinational Community Services. ‘We are seeing an upswing in loan activity with the agencies we deal with,’ he says. ‘There is activity on existing loans and new potential business in agencies with no previous loan portfolio experience.’
In particular, O'Malley notes that several key markets hit hard by foreclosure activity – particularly Florida, California, Texas and Nevada – will keep subservicers very busy for the rest of the year.
Steve Paton, senior vice president at Phoenix-based Marix Services, believes the subservicers will also benefit in handling the rising number of distressed mortgages.
‘In this emerging market of trading in distressed mortgages, people buying these mortgages want more input on how they are managed,’ he says. ‘In 2010, we'll be getting more business [with] distressed mortgages in the hands of private equity firms that have more flexibility in dealing with borrowers.’
Distressed loans are also occupying Miller's attention. ‘We see housing values dropping, and we continue to see foreclosures and delinquencies rising,’ he says. ‘We're focusing on being able to deal with that. We recently hired a new vice president in charge of defaults. Eighteen to 24 months ago, we had six or seven people working in loss mitigation; now we have about 38 people.’
Miller believes subservicers need to maintain a true win-win scenario for all involved parties. ‘We need to continue to maintain acceptable levels of defaults in our portfolios and keep people in their homes.’