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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.

Default mortgage servicing needs to get into 'the cloud'

October 5, 2011

Depending on which statistics one accepts, there are somewhere between 2.5 million and 7 million homes lurking in the shadow inventory. There are roughly another million homes already in the REO process.

But the default servicing industry appears to be largely unprepared for the houses that will enter the default, foreclosure and REO queue in the coming months.

The flow of REO re-sales has been uneven at best, for a number of reasons. As a result, the default servicing industry, asked to grow virtually overnight to handle historic volume, has only had its capacity and process efficiency tested in fits and starts.

In many cases, we have grown with our order volume, building systems and processes on the fly, ad hoc. Are we ready, then, to accurately and quickly service our clients when the floodgates open in earnest? Will our bolted together-systems and processes stand up to the enormous task?

There has been nothing predictable or routine about the origination and default cycle of the past five years. It seems unlikely that the next wave of REO transactions will be any different. If anything, this short lull and refinance surge may be a chance for us to catch our breath and prepare.

We have been an industry fairly resistant to change for decades, and our approach to technology and operations has reflected that. While other industries, during down periods, tend to reassess best practices and processes, or are even dragged into change by new businesses entering their space with new strategies and new perspectives; this is rarely the case in the mortgage industry.

After all, with so many moving parts and such high regulatory barriers to entry, ours has not always been the most enticing destination for new businesses. Accordingly, we’ve tended to be a bit traditional and/or conservative in our acceptance of innovation. Now, we face an untraditional and even historic default cycle. What is coming calls for bigger thinking and more aggressive planning.

One feasible solution we will be seeing more of in the very near future will be Web-based systems, or “the cloud.” It’s really pretty shocking that we haven’t seen more of it already. After all, with originations shrinking and volume volatile, the emphasis on improving margins is greater now than ever before. So why, then, do so many in our industry continue to use outdated systems (origination, production, etc.) that require bulky updates and on-site hardware?

It makes little sense.

There are already a few successful systems (loan origination, vendor and appraisal management and others) making their way into the mainstream of the mortgage industry. This will become the norm very quickly in default servicing, too.

The next REO wave will push this trend, as Web-based technology allows for scalability and flexibility to deal with the start-stop-start nature of this REO cycle. After all, when the next wave does finally crash upon our servicers — and sooner or later it will — clients will not care to hear that we’re bogged down. Nor will they have sympathy for us as we work frantically to ramp up our capacity.

It is time for us to prepare for the next stage of this strange market cycle. We can begin by getting as flexible as possible with our systems — before it’s too late.

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