Two firms working in default solutions quickly exited the market this month, sending a strong message that more players could leave the space in the near future.
"The dynamics of the market are definitely changing," said Diane Pendley, managing director at Fitch Ratings. "Defaults are going down, so the (servicing) volumes are starting to fade."
Pendley believes there's a backing away from certain types of default solution providers as new oversight requirements make these third-party relationships more difficult to manage and oversee.
"The servicers now have to do regulator reviews, they have to put them through a very tight screening," Pendley said. "They have to monitor all of their reports, and in some cases, they even have to go on-site."
With vendor managers having to put in a new level of quality control, it becomes more difficult to rely on smaller market players to provide specific default solutions.
"Two things are happening alongside each other," Pendley said. "Some companies just want to do their business. They don’t want to have to work with 10 different servicers coming into your shop. It may be easier to go off into a different direction especially as they see the value of the contracts start to dwindle."
She adds, "the solution may be that servicing shops will pull all the work in-house if they can’t find a vendor they're comfortable with ... or they may go with fewer vendors or larger vendors that can meet all of the requirements since they are more staffed."
Smaller default law firms also are backing away or exiting the space, Pendley suggested.
This is a direct result of more properties "going through short-sales or some other method other than foreclosure," she explained.
Not to mention, it’s more difficult to be an approved vendor or accepted law firm in today’s world, Pendley pointed out.
Steve Horne, CEO of servicer Wingspan Portfolio Advisors, agrees, saying the default space is now in a "consolidated phase."
"We are seeing a shakeout of a lot of companies that entered into the space in 2007 and 2008," Horne said. "The winners are emerging, and the others are either folding or consolidating into larger players."
He added, "In Wingspan’s case, our growth is being driven by the type of consolidation occurring in this space, so we are on the upside as we approach 2,000 employees and remain on a clear path to 4,000 employees."
The issue, Horne says, is the advantage that comes along with having scale when you want to provide servicing solutions in a high regulatory, strict compliance type of environment.