There was no shortage of discussions pertaining to the notable growth of the subprime segment of the mortgage market during the recent MBA National Mortgage Servicing Conference, held in late Feburary. One of the more notable themes conveyed during the event, however, was the impact that the shift in borrower credit quality has had on the servicing industry. This evolution, according to many of the speakers and presenters during the conference, has tainted the image of the servicing industry, which is ultimately responsible for administering the loans being offered to an ever-widening borrower base — but does not make a decision as to whether a loan should have been made in the first place. “We’re definitely seeing a change in borrower profile, a shift that dates back to before the 2006 vintage,” said Michael Gutierrez, head of the U.S. Servicer Evaluations group at Standard & Poor’s Ratings Services, during the rating agency panel. “What we’re really talking about is the fact that borrowers won’t be able to afford their loans down the road.”
Gutierrez, whose group at Standard & Poor’s evaluates the operational capabilities of approximately 85 residential mortgage servicing firms that are responsible for administering millions in borrower loans, added that servicers today face a set of challenges that weren’t present five to 10 years ago. Given these factors, their success rates are more than likely going to decline. “If borrowers have no equity in their homes and home value appreciation is restricted or declines, it will be much more difficult for servicers to mitigate losses with the same level of success they achieved 10 years ago,” Mr. Gutierrez commented. “The shift in borrower profile and the economic environment is going to definitely have an impact on loss mitigation efforts, which is why we believe that it will be that much more important for firms to get creative, improve their outreach and education efforts, and strive to really think outside the box.” In terms of creativity, the panelists detailed a variety of tactics being employed by a select group of firms throughout the industry, even though employing these efforts almost always means increased costs for the firms implementing them. Some examples included deploying loss mitigation teams to highly affected areas of the country (e.g., Michigan, Ohio) and partnering with counseling firms to expand outreach efforts to targeted borrowers. Despite the costs involved with such programs, the panelists stressed that firms making these efforts increase the likelihood that they will receive some cash from borrowers instead of no money. “Innovative thinking is truly going to be a key factor in loss mitigation going forward,” Mr. Gutierrez said. “Communication efforts should be creative and unique, and outreach programs need to be broadened. There may be staffing and cost issues involved with facilitating these efforts, but the bottom line is that yesterday’s loss mitigation tactics are no longer suitable in today’s environment.” From a credit perspective, Mr. Gutierrez noted that the pressures and risks associated with the subprime market may have a financial impact on a servicer’s business to some degree, but stressed that financial standing ultimately shouldn’t be viewed as a determining factor when it comes to assessing a firm’s overall ability to effectively administer loans. “It’s going to cost servicers more in today’s market to effectively service loans and mitigate losses with regard to those loans,” he added. “As a result, a firm’s credit rating or financial standing may dip a little. From our perspective, as evaluators of each company’s servicing ability, however, we give credit to those firms that go the extra step, even if doing so has a slight financial impact. In terms of servicing, we do give credit to companies that really go the distance and ‘try to bring the borrower in from the cold,’ which means offering things like extended outreach, additional education, and offering flexible payment options. And these are the things that servicers are going to need to do if they want their loss mitigation success rates to keep from dropping significantly.” For more information, visit http://www.standardandpoors.com.