Insiders agree that while best loss mitigation strategies vary case-by-case including a loan modification, a deed-in-lieu, a short sale, doorknockers and face-to-face interaction, or the one point of contact, servicing compensation remains a key mortgage industry challenge for both servicers and their third party service providers.
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“There’s got to be enough money on the table” to execute a workout that generates a servicing revenue commensurable with the desired result, says Steve Ozonian, chief real estate officer of Carrington Holding Co., which operates 80 local real estate, mortgage lending and servicing, property management and property preservation offices nationwide. There is no one solution, he says, but best practices start with identifying the unique characteristics of the borrower in question and defining the best alternative given those characteristics. “It’s the asset. It’s the amalgam of various information.”
Vendors inquiring how to facilitate best mortgage servicing practices find that third party, often costly service solutions are directly affected by a servicer’s incentive based pricing and compensation.
James Zeldin of Default Resource, a provider of REO management, valuation and loss mitigation services, is just another market insider who sees “servicer compensation” as key. As a mortgage servicing support services provider, Zeldin sees how differences in servicing compensation affect mortgage workouts and how the new special servicing compensation standards have helped improve loan resolution rates and the identification of best resolution strategies. “We need to be able to extricate the financial incentives for the servicer, to continue to support the borrower.”
The debate about how and why the servicer compensation must change—to ensure for example that servicers do not receive the same 25 basis point fees on a Fannie Mae and Freddie Mac loan they used to before the foreclosure crisis dramatically changed the mortgage servicing process—continues.
A new compensation structure, however, will ultimately force servicers to change. Zeldin says servicer clients are creating unique strategies to execute across their business model. For example, some of the new Fannie requirements that both penalize or offer incentives for the completion of a full mortgage loan modification documentation package force servicers to think outside of the box and update their traditional borrower contact model to be able to maximize the completion of that full package and then be able to take it through resolution and execution, whatever the resolution alternative happens to be.
This carrot-and-stick approach is changing the status quo of loss mitigation practices. “It has made it harder for servicers” to achieve the kind of results the government and the public expects from their individual and collective efforts.
At the same time there is opportunity. Jay Loeb, vice president and a principal owner, National Creditors Connection Inc., Lake Forest, Calif., finds all these market changes are creating opportunities for third-party service providers who assist servicers as much as it requires that servicers learn where to spend and where to save money as they try to come up with the best workout solution for a distressed loan.
“They’re going to have to be able to open up their pocketbooks and say here’s where we can target X amount of dollars to make an impact and it may not always pencil out from the onset,” he argued. “Those who are going to survive are going to take the incentive-based pricing and spend more money upfront early in the process so they will let that python get to the end and try to solve it 20 days before a foreclosure sale.”
Ronald Jasgur, president of Woodward Asset Capital, also expects to see more incentive-based servicing in the future, such as upfront fees and back-end incentives. For example, if servicers outperform certain expectations, they share a larger piece of the incentive pool.
“It is a way for a service provider to gain traction within the servicing market,” he said, train staff accordingly and construe industry best practices by leveraging technology and process that a servicer may have been ill-equipped to handle or identify in the past. “A bunch of cottage industries can be developed out of these issues that are coming on.”
Staffing for both the servicers and their vendor partners is also crucial, says Steve Collier, vice president of loss mitigation at Prommis Solutions, because now servicing resembles more a retail model than the old school, collections servicing model. It really is a borrower outreach program so some of the best servicers whose practices have been more efficient today are former loan originators.
“I mean, they’re retail folks who have phone skills, are really looking to help borrowers, and have a keen ear to listening to borrowers.” Before loss mitigation became prevalent, servicing was simple. Now that gradually loss mitigation is at the core of servicing, “a key component to the success of the public best practices falls on the staff of the servicer and the vendors.”