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Weekly UpdatesThe numbers are staggering. In the first quarter of 2009, foreclosure actions were initiated on 1.37 percent of first mortgages nationwide, according to the Mortgage Bankers Association (MBA). That's a level not seen in almost 30 years of reporting on such data. Some studies suggest as many as 5.4 million mortgages are currently delinquent. * Because the pipeline of borrowers in trouble is so very large, it appears it will be some time before the massive glut of foreclosed properties moves through the real estate--owned (REO) process. * Although it is not a story mortgage lenders like to tell (or hear) the simple fact is the default, foreclosure and REO market will be a large one for the foreseeable future. It is also becoming increasingly apparent that few originators nationwide were truly prepared for the enormous spike in properties needing to be retrieved, maintained and resold. * Standing processes and methodologies for processing or outsourcing the work on REO properties have shown quite a bit of strain, or even snapped, under the crushing weight of this unprecedented volume. And many lenders have quickly found themselves turning to outsourced solutions to manage the crisis.
But industry insiders are beginning to observe that a significant number of these ad hoc outsourcing strategies have given rise to problems of their own.
The foreclosure and REO market will likely remain strong for some time. Because many of the loss-mitigation strategies in place today were crafted for a much different set of circumstances, it is time for lenders to review and strengthen their own checklists, processes and procedures for selecting and managing the best REO and default service providers, and to build the most effective REO/default-management strategies.
Choose the best fit
Assuming that a lender has decided to outsource its REO and default-management processes, choosing the best service provider and the best fit for that lender's needs is critical. Yet, industry insiders see a variety of fatal flaws in the way that process often takes place. If anything, the problem is that a "get it off of my plate" mentality has emerged at times, leading to larger problems down the road.
David Francis, assistant vice president with Phoenix Asset Management LLC, Denver, has 17 years of lending and servicing experience. He says he has seen some lenders build or adjust their screening and selection process for REO and default vendors almost on the fly, in the midst of volatile circumstances.
"Too many banks are building or rebuilding their screening process while they are in crisis mode, and they'll suffer the consequences for this [over the] long term," he says. Although rapidly changing market conditions and regulatory circumstances call for some flexibility, as lenders adjust their screening process, that process should be revisited thoroughly when time allows.
It goes without saying that the criteria set in place for vendor selection are vital as well.
Linda Simmons, general manager, mortgage, with Bethesda, Maryland--based Overture Technologies Inc., believes that many lenders are emphasizing the wrong metrics as they screen potential service providers.
"Many are measuring their partners solely or primarily by their financials," she says. "They are measuring unit cost and cost per person rather than reviewing ROI [return on investment] or performance-based metrics," she says.
Instead, Simmons suggests, lenders should emphasize turn rates, value on return and even cure rates when it comes to the process. "Financials are only part of the REO and default servicing industry," she points out.
Even more than the appropriate metrics, lenders should be sure a potential vendor is a match when it comes to culture and mindset. If a service provider is not equipped to meet the strategic goals or does not understand the mission of its client, the process becomes even more costly when and if that vendor's missteps must be remedied or the vendor itself must be replaced.
John Jensen, senior vice president, loss mitigation and risk operations, with Cleveland-based Key Bank, points out that his institution is a regional lender that places high strategic importance on community relations. "One mismanaged property can damage our reputation and business across the board," he says. "Our default and REO vendors need to be able--and willing--to handle customer service appropriately and ensure our place in the community."
Don O'Neill, division executive-strategic initiatives with ISGN Solutions Inc., Bensalem, Pennsylvania, has been in the default and foreclosure business for 20 years. He echoes Jensen's sentiments.
"For a credit union [that] takes a multi-product approach, member service is a high priority and a mortgage default is not an isolated event. The member who is delinquent on his or her mortgage may still be a potential auto or student loan customer down the road," says O'Neill.
The service provider must be in lockstep with its lending partner and be capable of meeting the lender's standards on the issue in such cases, making the "fit" of the partnership just as important as past performance, capacity or capability.
"Capacity and scalability are important," he cautions, "but can your vendor do the deals you do? Have they done the type of work you need before?" Those are some questions that need to be asked.
Can the service provider meet your needs?
Insiders differ on the importance of a vendor's history and capacity. Most agree that reputation is critical, but Francis believes the "cradle to grave" offering is not always the best fit. "Size and capacity aren't everything," he notes. "Rather, are they suited to your particular needs?"
Simmons agrees, and feels that some lenders lose out on some of the servicing innovations and breakthroughs of the past two years when they exclude new vendors. Jensen also believes that it "can be tough for new vendors to break into the servicing space."
Others, such as O'Neill, point out that capacity is very important right now. Although O'Neill also stresses the importance of specific fit to a lender's needs, he cautions that no service provider has unlimited capacity. "You don't want to discover that your service provider can't handle your pipeline after you've selected them," he cautions.
Jensen also asserts that the size or function of the lender can magnify the consequences of a poor screening or selection process. "Some of the larger lenders use multiple service providers. If one makes a mistake, the bank can simply shift its REO portfolio to other service providers without major damage," he says.
But for a smaller or regional lender, a miscue by its only service provider can mean additional time and cost devoted to rework and mitigation. Or, even worse, such a development can drive the lender back to the drawing board to replace the service provider--all while new delinquencies continue to pile up.
Be thorough. Be comprehensive.
Matt Inks, foreclosure and REO manager for Key Bank, says the best approach is to employ a rigorous and overlapping selection process. "We have a very structured set of criteria, including on-site visits, which are critical; financials review; risk-assessment survey; reputation and performance record; REO cycle times; sales, loss rates and ability to reposition properties; information/data security and so on," he says. "Each one of these things is very important," he adds.
Finally, when it comes to vetting potential service providers, lenders can and should still rely on some of the traditional and time-tested techniques. But they should do so thoroughly.
Relationships and references are still a solid way for a lender to do its due diligence during the selection process. But, warns Francis, "Don't always take their word for it."
He adds, "I appreciate reference calls like this, and always try to return them. And I do check in with colleagues and friends. But I also may pick names out of the MBA [Mortgage Bankers Association] directory or drill down with some of the industry leaders, whether I know them personally or not."
Francis reminds lenders to ask tough questions of the references provided, such as: How does the vendor handle crises? How responsive is the vendor? What are its ups and downs? The human, non-quantitative element is still a very important part of the vetting process, but it needs to go beyond a single recommendation or two.
The three C's of managing service providers: clarity, collaboration and communication
Once an REO/default service provider has been brought into the fold, the real work begins. Industry veterans are adamant that the lender's work is only just beginning at this point.
"You can't just throw it over the fence and hope it goes away," says O'Neill. "One of the biggest mistakes I see out there happens when a lender goes through a lengthy and sophisticated selection process, then hands it off. It's a 'hot potato' approach. If you aren't actively--even aggressively--involved, it becomes your problem again."
While Jensen and Inks believe that lenders should be consistently reviewing quality, timeliness, caliber of marketing and property preservation, and similar factors, they should be doing so from a hands-on perspective, they say.
For best results, it is clear that lenders of all sizes need to mind the three Cs of servicing management: clarity, collaboration and communication.
Clarity
Vendors, consultants and lenders agree that it is up to the lender to establish a very clear set of goals and directives from the get-go. The lender must spell out in no uncertain terms what it expects from the service provider, beginning with a well-written letter of agreement. O'Neill suggests detailed process mapping as a road to clarity.
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