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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.

A national standard for servicers — stupid

June 3, 2011

There’s a whole science that grew up around looking back into time and trying to detangle, given the events, what is really going on.

Scientists who study the universe do this, as do particle physicists who smash atoms together and study what ever gets left behind. Lately, we’ve seen the federal government spending a lot of its time doing this, through formal commissions, like the Financial Crisis Inquiry Commission, and in its regular lawmaking activities.

While many in business tend to scoff at this as rearview mirror driving, it’s important to pay close attention to the conclusions these government bodies arrive at as they will most certainly be reflected in future regulatory rule making.

Take, for instance, the current investigation into the mortgage servicing business. It has become clear to almost everyone that when the market turned and the nation's largest servicers found themselves dealing with 10 times as many troubled borrowers as ever before in their history that they found the situation challenging. Okay, let's just say it: they froze like a Pennsylvania deer in the headlights and got mowed down by delivery trucks full of loan modification requests and short sale paperwork.

By the time they’d realized what had happened, middle managers throughout their organizations were cutting corners anywhere they could to respond to management’s cries to respond appropriately to borrowers who were either already halfway into the economic grinder or tossing over their keys in a strategic approach to dealing with the crash. The Robo-signing controversy is now working its way through Attorney Generals’ offices around the country.

In the space, I have sent plenty of darts over at the anti-foreclosure attorneys who, at best, were just trying to keep hard working Americans in their homes (and at worst were committing fraud on a daily basis in an attempt to end up with the properties they already knew their clients couldn’t afford). But this wasn’t really the fault of the legal industry. It was the servicers.

Now, Uncle Sam has affixed his reading glasses to the bridge of his nose and is looking into the rearview mirror in an attempt to understand just what the government needs to do to make sure this never happens again. Of course, the government doesn’t have any idea what happened and unless there are some experienced servicing personnel working for the government that I don’t know about, they’re not likely to figure it out.

The government thinks that the servicers performed so poorly during the crash because there were no set standards for the way they were expected to operate. The truth is that the servicing industry performed so poorly during the crash because the people working in the servicing shops were following the handbook to the letter and treating delinquent borrowers exactly the same way they had treated them for the past 10 years. They were actually performing very, very well. Just for the wrong type of market.

Mortgage loan servicers take a completed transaction from an originator or investor, board it onto a mortgage loan servicing software platform and then let the software send a bill to the printer and then on to the folder and the stuffer before being automatically sealed and sent through the mail department to be stamped with a postage mark and sent to the post office for delivery. That’s when they send a bill. Some servicers ship out a coupon book full of bills at the beginning of the engagement and let borrowers send in their checks unreminded. It used to work just fine.

When the money comes back into the servicing shop, a slitter opens up the envelops and rows of servicers punch in a few keyboard commands to let the general ledger know that another payment is received. Upstairs, a report is generated that tells management what percentage of borrowers are delinquent. In the past, that percentage was very low, especially for the nation’s largest servicers, those firms that serviced loans for Fannie Mae and Freddie Mac and turned the subprime work over to special servicers.

This system was groomed over the years by conscientious managers who squeezed every penny of cost they could out of the system and streamlined the operation for peak performance… under a certain set of conditions. When those conditions changed, management was the deer in the headlights.

Now, the government wants to employ its rearview mirror to change the future direction for the industry. Forget the fact that it’s way too late to save anyone who got ground up in the crash and just focus on the idea of people who know nothing about your business using the past as a guideline for setting up your future working standards. Who among you thinks this makes any sense?

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