Mortgage servicers are the heart pump of the home loan world. You don’t see them but you know they are there, as without their presence who would process all the loan payments?
Over the past three decades, mortgage servicers have been responsible for collecting payments and ensuring taxes are paid and core processing of the loan is handled and managed. Sometimes the mortgage servicer is your own bank, sometimes not.
This was an easy-breezy business. With good technology, a mortgage servicer could handle millions of loans daily without a stumble. Payments arrived, mortgages paid, and the circulation of dollars through the home loan process continued smoothly.
However, like with your own heart, which keeps your blood efficiently circulating throughout your body, sometimes problems occur, and if you don’t take care of it — well, you know what happens.
If you eat too many unhealthy foods during your lifetime, your arteries could get clogged, causing a heart attack. A similar thing happened to mortgage servicing — it was unknowingly feeding on too many bad loans.
The mortgage servicing industry functioned very smoothly up until around 2005, but the model was built around a 1 percent to 3 percent default rate. Then, from 2005-07, default rates jumped to 5 percent. Today, default rates range from 7-12 percent. This is the equivalent of a clogged artery for mortgage servicing.
The servicing industry was not designed to handle so many defaults. Its cost structures and contracts were not designed to handle so many problem loans, which is one reason the foreclosure problem has ballooned and it’s been so difficult for everyone from the government to the folks on the ground — the real estate brokers — to make headway against this problem. The heart pump is damaged.
One person with a lot to say on this subject is Ryan Tomazin, president of Integrated Asset Services LLC, a Denver-based company that provides residential mortgage service solutions.
Tomazin has been an advocate for change in the mortgage servicing business and his company has produced a number reports to back up his assertions, including one earlier this year entitled, "A New Era of Mortgage Servicing: Out of Crisis, Solutions."
The key thing the mortgage servicers were not allowed to do was provide an exit strategy for a bad loan, said Tomazin. Instead, legislators went in the wrong direction, asking the servicers to mitigate and modify mortgages that were incapable of being modified.
"The servicers still face the same problems because of what legislation is asking of them," Tomazin explained. "What the legislation said was, ‘John Smith didn’t make his mortgage payments and consequently, you need to talk to John Smith and you need to find out why he didn’t make his mortgage payment, offer a solution and make it all palatable.’ "
It was an unworkable idea, Tomazin stressed. "The numbers show this. They have attempted 1.5 million modifications and the success rate is in the single digits (on a percentage basis)."
The mortgage servicing strategy has been to kick the bad loans down the road to a special servicer, or at least that’s what they try to do, but many servicers have what Tomazin calls "built-in" special servicers. In either case, the special servicers are so overwhelmed they now are operating like the servicers.
"We need to get to an exit strategy," proclaimed Tomazin.
Part of this "exit" effort is HAFA (Home Affordable Foreclosure Alternatives program), the short-sale initiative put forth by the Treasury that was actually designed to get a troubled property to change hands in the marketplace.
Although Tomazin likes the concept of HAFA, the same problem exists: "The banks are overwhelmed and not designed to handle that flow of work."
One answer to the short-sale effort, including HAFA, is to work smarter. Or, to Tomazin’s way of thinking, improve the data and make use of the improved data.
"HAFA is not working because we simply don’t have the arms and legs," he said. "We need to be smarter with the data or else we just keep moving the problem down the road. We need to look at the asset and try to do something that leads to a solution and not another prolonging of the current borrower situation."
An example: If you are given a property in Orlando, Fla., where the borrower has not made a mortgage payment in a year and a half, this is a clear indication the homeowner probably cannot and will never be able to make a mortgage payment. The general solution is to get a valuation on the property and then determine what the next step is.
Tomazin calls this working with blinders on.
On the other hand, if you had better data, then the next step becomes clearer. If you learn the Orlando property in question is sitting in a country club area where values are down only slightly, 7 percent over 12 months, and in the surrounding area sales have been steady, you can then go to the homeowner and say, "We are willing to short-sale this asset at X price, and then within the next 60 days resell it at Y price."
The reason you can do that is because you know what the neighborhood is, you know where the property is located, you know how the properties around it are performing and with real-time data you can make a more succinct determination about the property.
I asked Tomazin why a broker should care about improved data. He answered, "If you are a broker at the end of a short sale that’s taking six months because the bank can’t make a decision, that’s a tough situation. If the broker is on the other side dealing with the banks and knows the execution price because he knows the neighborhood, this is a deal that can get done."
He added, "Brokers are out there working very hard, transactions are hard to come by, tough to close, tough to finance and tough to get a decision made. In a data-driven model, the broker can get to an executable transaction much quicker and more efficiently."