This story was originally featured in the February edition of DS News, out now.
John Vella serves as Chief Revenue Officer of Altisource and was previously President and COO of Equator, LLC. He began his financial services career with the FDIC and Freddie Mac and later served as Chief Sales Officer for H&R Block's mortgage company, CEO of Household International's Automotive Business, and President and CEO of Bear Stearns EMC Mortgage Company. This month, Vella shares his views on challenges that will impact the industry in 2018, as well as how new technology is helping servicers manage cost.
In what ways are servicers seeking to lower their costs? How can new technological innovations and working with third-party vendors help them achieve this goal?
The cost of servicing has tripled over the last several years due primarily to compliance playing a bigger part of the cost structure and the amount of resources that have been put toward managing a loan throughout the process. Remaining compliant has required changes in technology, process, and training.
Now, in order to obtain proper margins, it is paramount that servicers focus on lowering the cost of servicing through additional technology enhancements. Utilizing APIs (application programming interfaces) to bring in third-party data enables more a sophisticated decision- making process without the risk and associated manual processes.
The industry is seeing advancement in decisioning tools such as optimal outcome and database analytics that allow servicers to manage loans in a more efficient and effective manner. By identifying the optimal outcome for individual loans and properties, servicers can reduce their costs, lower their severity, and reduce their advances.
Auto decisioning and exception-based workflow management allows for the appropriate focus on potential problem scenarios when meeting investor and service-level requirements. Servicers are also reducing costs by outsourcing additional functions, allowing them to move to a more-variable cost structure versus a fixed-cost structure. However, with additional outsourcing, the requirement to select and manage vendors becomes more prominent.
Cyber and data security are also key focus areas and in the forefront for obvious reasons, especially when it relates to all the borrower data that is held by the servicers. Data security and cybersecurity are more of a risk-management function than a cost reduction capability, but any breach or issues with technology security could result in astronomic costs and headline risk to the loan servicer.
What are the main compliance concerns that servicers currently have?
There are still many unknowns when it comes to the future direction of the Consumer Financial Protection Bureau (CFPB) and the current administration when it comes to regulatory compliance. For the last several years, servicers have been complying with state and local regulatory agencies and putting the proper process, training, and technology in place to help employees maintain compliance, and they have done a fantastic job. Now, with changes at the head of the CFPB, some of those rules will obviously change, while some of the rules may be eliminated. e unknown will eventually result in change that will lead to additional costs. The changes will require additional change management throughout the entire servicing operation, including training, technology, and workflow.
Over the past several years and the heightened awareness around compliance and regulatory issues, the borrower has become more cognizant of servicing practices and what their rights are throughout the process. From a compliance standpoint, servicing personnel must continue to remain compliant when functioning as a single point of contact for borrowers by being properly trained and monitored. Having the compliance and regulatory rules embedded in the operating systems, along with proper scripting will remain a requirement. As you go across hundreds of people in a servicing operation, the need for consistency is paramount, especially with all the upcoming changes that could be taking place and the changes that continue to take place as a normal part of the compliance cycle.
What other anticipated changes do industry professionals need to watch this year?
Because of rising interest rates, the market has become primarily a purchase market. The refi business has slowed down tremendously, impacting the servicer’s runoff rate on the portfolio, along with the value of the mortgage servicing rights. We are seeing origination growth in the Federal Housing Administration (FHA) and purchase products along with an emergence of non-QM originations. This coming year, we will see that trend continue which could impact delinquency and nonperforming loan volumes. The growing FHA portfolios will continue to be a challenge for servicers to manage. Managing a delinquent FHA asset requires a lot of diligence and cost with severe penalties and fines, if not managed correctly. In terms of adherence to FHA servicing guidelines, the emphasis will be focused on managing title, property, and valuation issues earlier in the delinquent lifecycle. This practice will mitigate risk, avoid conveyance, and lower servicers' costs.
This year, you will also see a more aggressive oversight process when it comes to managing third-party vendors. The risk in today's market is that vendors who have seen a reduction in their volumes are not investing in their infrastructure. This will ultimately result in vendor consolidation and certain vendors potentially going out of business. These scenarios require servicers to work with vendors who have a strong balance sheet coupled with a strong compliance and vendor management platform.