Editor’s Note: This feature appeared in the November issue of DS News.
According to the Mortgage Bankers Association’s 2017 Servicing Operations Study, servicing costs for nonperforming loans (NPLs) rose from $482 to $2,113 during the last decade. A February 2018 Urban Institute report entitled “Reforming the FHA’s Foreclosure and Conveyance Process” found that a single defaulted loan can suck the profits from 12 performing loans. This is a fundamental problem facing the industry. Compliance overhead, complicated investor rules, and unfair penalties for missed dates are often blamed for these cost increases. Such factors certainly don’t help, but they are only half the story. Fundamentally, most servicing platforms do not have the experience, the know-how, or the technology to deal with defaulted properties.
Managing a defaulted loan is like battling through the jungle without a map. Danger lurks in the undergrowth, but most of the survival tools have been outsourced to specialty shops or vendors. Those ultimately responsible for managing the asset often live in hope that the third parties to whom they have ceded control and management will rescue them. Asset owners are frustrated by their servicers. Servicers are frustrated by their vendors, and the troops in the field are often not paid enough to do quality work. Problems persist throughout the supply chain, and many servicers are struggling to manage it all. Consequently, default servicing leaks money across the entire process. But there is a smarter way forward.
WHY IS DEFAULT SERVICING UPSIDE DOWN?
Fundamentally, investors/asset owners and their servicers have ceded control over the asset to their service providers, whether it is full outsourcing to specialty shops—which adds another layer in the supply chain—or outsourcing of the inspection and preservation elements of the default process. As a result, asset owners and their servicers lack control or visibility of the rules, money, data, management, or compliance across the supply chain. This adds unnecessary overhead, removes accountability when key dates are missed, exacerbates stress, and leaves everyone wondering why servicing is struggling to make profits. Ultimately, it creates suboptimal outcomes for all stakeholders, including the borrower.
Vendors retain asset owner and servicer data—the tools a servicer needs to survive the jungle. Vendors decide when to carry out work. Vendors apply the investor rules. Any oversight and sign-off processes that do exist are fundamentally inefficient and deficient in oversight and control. As the industry continues to consolidate, it may prove very difficult to retrieve the data from vendors that leave the industry. Servicers often are required to train their own internal staff to work on multiple vendor systems, which are difficult to mine for data when claims are made and can trigger antagonistic encounters with vendors over timing, money, services, and other issues. Key dates can be missed. A property can come current in the servicing system, but costs are incurred because work orders are canceled too late. FHA conveyance rules and timelines exacerbate this problem because missing a key date simply drives costs up and makes it difficult or impossible to claim all allowable expenses.
National inspection and preservation providers are expected to recruit and manage vendor networks. They are expected to manage properties aligned to the many different investor rules and guidelines. They are expected to perform QC work to a high standard and shoulder the burden of billbacks, upfront payments, canceled work orders, and much more. Furthermore, many of them invest millions of dollars in technology—a cost that must be borne from fees earned. They compete in a shrinking space and attempt to differentiate on technology or specialized forms, methods, or other secret sauces. In an ideal world, they would concentrate on core services that add value such as vendor management and recruitment, performance management, compliance, and QC.
Apart from a lack of control and data and a surfeit of responsibilities, mortgage servicers face one overriding barrier to the efficient management of defaulted assets: the inadequacy of loan-servicing platforms for managing the asset itself. Consequently, Excel spreadsheets, access databases, a myriad of integrations, work-allocation systems, and other motley solutions have emerged in servicing and asset shops to try to manage this process. These systems complicate issues for staff, create silos of expertise, cause inefficiencies and missed dates, and drive up the overall timelines and costs of servicing defaulted loans.
We can blame the mortgage crisis of 2008 for many of the shortcomings in default loan servicing. Faced with a barrage of mortgages entering default, mortgage servicers had to scramble to deal with the REO crisis. Preforeclosure and other default processing resorted to manual workarounds while the REO avalanche was the focus. A decade has passed, but few mortgage servicers have gone back to deal with the entire default-servicing process in an efficient way. Now is the time to address those issues, before the broadly anticipated turn in the market.
A defaulted loan triggers a host of servicing subprocesses that are designed to offer lenders and borrowers adequate risk-mitigation options. Asset owners and/or servicers must take control of the rules for default servicing. This means implementing technology solutions that can control, automate, and help manage these rules across the supply chain.
Asset owners/servicers must control the data or have direct and easy access to the data. This means form data, photographs, vendor compliance data, and performance data. Having access to and control of the data has multiple benefits for driving efficiency, compliance, auditability, risk-reduction, cost-reduction, process improvement, business intelligence, and ultimately, creating better outcomes for all stakeholders.
Implementing standard forms, processes, measurements, and metrics across the supply chain means that data becomes normalized, useful, and measurable. We all know that “what gets measured gets accomplished.” Using standardization across property servicing in default will reduce costs, enable much easier upskilling of people, and facilitate easy measurement and performance improvements. Standardization can be implemented in this industry from top to bottom with all the mobile operators in the industry. They are willing and able to help.
Implementation of the property-servicing model outlined in this article does not require asset owners/servicers to ramp up a large department of people to manage the process, nor does it mean you must stop using the trusted service providers you have been using for many years. It does mean that you must implement technology to help manage and drive the process.
Through the implementation of technology to track rules from the top and capture standardized, normalized data means that property servicing can be implemented without hiring and using existing people and existing service providers. Different models can be implemented, from simple oversight and rules management to more in-depth control over the workflow and process. Options exist to suit each asset owner or servicer.
A WAY OUT: THE PROPERTY SERVICING SOLUTION
Implementing a property-servicing platform that sits beside and complements loan servicing while focusing on the asset and not the loan allows servicers/asset owners to retain survival tools and manage NPLs effectively. This approach slashes default processing costs and leakage and helps servicers hold on to their hard-won profits. Property servicing uses a single platform for property-related data that is maintained and updated with key information in real time or near-real time, implements standards across the supply chain, allows every member of every department to work in one system, integrates to the servicing platform, ensures key dates are not missed, and houses and drives all the investor rules. This solution drives efficiencies, reduces leakage, enables compliance, manages vendors and service quality, integrates to services such as property registration or loss mitigation, captures data upfront for claims processing, and ultimately, leads to a smooth, normalized default servicing capability and management.
Embracing this solution requires courage. Servicers and/or asset owners must require their service providers to use it. They must bite the bullet on project implementation. They must resource the project to turn this industry right side up. With bravery comes reward, and the losses being incurred to manage defaulted properties can be reduced dramatically. The proper investment in managing the defaulted asset through resolution can be achieved to the benefit of all stakeholders.