Servicers Could Earn Higher Ratings Focusing on Loss Mitigation

MBA (3/3/2008 ) Palaparty, Vijay
NEW ORLEANS—Mortgage servicers can best achieve higher ratings by increasing focus on loss mitigation, as recommended by panelists speaking here at the Mortgage Bankers Association’s National Servicing Conference & Expo.
“Negative rating actions on residential servicers have been driven solely by the financial condition of the company or parent company,” said Diane Pendley, managing director at Fitch Ratings, New York. “Actions result in limiting or shutting down origination platforms or a sale and/or acquisition. Financial conditions factors also affect all rating types and products. In projecting for future negative actions, sale and acquisitions of servicing platforms continue. Additionally, operational performance is expected to become a driver of downgrades as stress increases on servicing platforms.”

Challenges mortgages servicers currently face include continued liquidity restraint, making it difficult for borrowers to find refinancing options or purchasers to find financing, Pendley said. “As a result, loans remain in portfolios and have potential to default. Lack of new loan originations (performing) to off-set aging (sub- or non-performing) affects costs of servicing as well. Parent/owners who are reliant on origination income may see additional downgrades or deterioration, affecting servicers’ financial condition and/or funding lines,” she said.

Continued declines in home values also affect default rates as borrowers are unable to sell or refinance, Pendley said. “As a result, more defaults require more resources in collections, loss mitigation, foreclosure and REO areas. Backlog increases and extended timelines also see a rise in property inventory—all driving up servicing costs,” she said.

“Home price growth has turned down sharply and implementation of loss mitigation strategies could help the industry,” Pendley said. “Executing streamlined modifications, understanding the volume of regular modifications needing to be processed, identifying fraud or other breaches of reps and warranties, realizing mortgage insurance claim denials and/or curtailment and implementing new reporting requirements could also help the situation.”

Bill Fricke, vice president and senior credit officer at Moody’s Investor Services, New York, said a dual approach to loss mitigation would be most effective for servicers. “In the process, a proactive approach to contacting borrowers—early and often—can reduce losses. Using innovative contact methods, early identification of the reason for default, employing staffing expertise, engaging technology—both in front and back-end—and knowledge of guidelines should be in the process. Incentivizing loss mitigation practices can also give more importance to its value.”

“How servicers will balance labor and cost-intensive loss mitigation work with present servicing fee income structure and how a drain on the industry resources and talent pool might make it challenging for servicers to appropriately meet staffing needs are considerations in the servicing landscape in 2008,” said Richard Koch, director at Standard and Poor’s, New York.

Koch said key servicer performance indicators include monitoring the servicing portfolio for payment shock risk. Service performance indicators include ways servicers use short- and long-term forbearance plans to mitigate losses and to prequalify borrowers for loan modifications.

Koch said “the loss mitigation talent pool will be in heavy demand during the next 24 to 36 months and servicers will need to do adequate planning capacity to attract and retain both management and counselors.”