DS News - U.S. Bank

64 I N D U S T R Y I N S I G H T / S E A N R Y A N Default servicing costs have skyrocketed over the past decade, leaving servicers lost in a jungle filled with compliance overhead, complicated investor rules, and unfair penalties. Finding the way out requires knowing exactly what you're looking for. According to the Mortgage Bankers Association's 2017 Servicing Operations Study, servicing costs for nonperforming loans (NPLs) rose from $482 to $2,113 during the last decade. A February 2018 Urban Institute report entitled "Reforming the FHA's Foreclosure and Conveyance Process" found that a single defaulted loan can suck the profits from 12 performing loans. is is a fundamental problem facing the industry. Compliance overhead, complicated investor rules, and unfair penalties for missed dates are often blamed for these cost increases. Such factors certainly don't help, but they are only half the story. Fundamentally, most servicing platforms do not have the experience, the know-how, or the technology to deal with defaulted properties. Managing a defaulted loan is like battling through the jungle without a map. Danger lurks in the undergrowth, but most of the survival tools have been outsourced to specialty shops or vendors. ose ultimately responsible for managing the asset often live in hope that the third parties to whom they have ceded control and management will rescue them. Asset owners are frustrated by their servicers. Servicers are frustrated by their vendors, and the troops in the field are often not paid enough to do quality work. Problems persist throughout the supply chain, and many servicers are struggling to manage it all. Consequently, default servicing leaks money across the entire process. But there is a smarter way forward. WHY IS DEFAULT SERVICING UPSIDE DOWN? Fundamentally, investors/asset owners and their servicers have ceded control over the asset to their service providers, whether it is full outsourcing to specialty shops—which adds another layer in the supply chain—or outsourcing of the inspection and preservation elements of the default process. As a result, asset owners and their servicers lack control or visibility of the rules, money, data, management, or compliance across the supply chain. is adds unnecessary overhead, removes accountability when key dates are missed, exacerbates stress, and leaves everyone wondering why servicing is struggling to make profits. Ultimately, it creates suboptimal outcomes for all stakeholders, including the borrower. Vendors retain asset owner and servicer data—the tools a servicer needs to survive the jungle. Vendors decide when to carry out work. Vendors apply the investor rules. Any oversight and sign-off processes that do exist are fundamentally inefficient and deficient in oversight and control. As the industry continues to consolidate, it may prove very difficult to retrieve the data from vendors that leave the industry. Servicers often are required to train their own internal staff to work on multiple vendor systems, which are difficult to mine

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