Smaller servicers can stay in the game

Mortgage Banking, March, 2007 by James Dowell

As originations have slowed this last year and seem settled in for a continued soft spell in 2007, mortgage companies have an excellent opportunity to start or expand a loan servicing operation.

Historically, this new or expanded venture was not financially feasible for smaller players, and they were forced to drop out of the game when times got tight, allowing the big servicers to get bigger. However, the advent of flexible technology, featuring database accessibility, means a small company can enjoy the counter-cyclical benefits available during leaner origination times. The simplicity of rules-based decisioning technology means you no longer need large servicing contracts to succeed in the servicing business.

And, ironically, those companies that have paid millions of dollars for megasystems now may find themselves hard-pressed to handle the current tide of nontraditional mortgage products that comprise the majority of new loans today.

In the past, with shrinking margins and rising costs, small operators never stood a chance of making a profit in servicing. The servicing business was reserved for the few goliaths that could afford to purchase one of the old legacy systems, where the break-even point is not realized until you reach half a million loans serviced.

Today a company can get new browser-based technology for about 65 percent of what it would cost to buy one of these megasystems and get in the game with one-tenth the number of loans. Servicers that currently have small, 50,000-loan operations, struggling to make a profit, no longer have to sell off those portfolios.

With originations expected to drop 11 percent this year and another 7 percent in 2008, and with foreclosures up 19 percent, what better time to round out an originations business than with a servicing component that offers real-time computing? Servicing technology that has this ability provides vital insight into loan portfolios at a time when investors are more sensitive than ever to asset quality and performance. Risk mitigation and fraud prevention are additional benefits derived from a nimble servicing system.

Recent statements from the Federal Bureau of Investigation (FBI) indicate that mortgage fraud is becoming more organized, and the FBI is calling on the mortgage business for help, leveraging its expertise and industry knowledge.

Originators have long carried the burden of fraud detection, and there are few platforms that allow easy data retrieval between origination and servicing systems. Aging servicing systems hamper an organization's ability to "know" its customers. Newer servicing technology now on the market can retrieve borrower information directly from the loan origination system (LOS) so there is no data loss during the loan's transition.

Given the spread of fraudulent activities, a servicer is better positioned if it can retain private borrower information, rather than worrying about a third party's potential unapproved disclosure.

Faster, better and more economical

Rising defaults and slow response times equate to higher costs and lower profits. An increase in defaults also means that whoever can provide faster, better and more economical results will succeed while others fail.

Because the transparency issue is so important today, it is critical to have automated interfaces to investor systems so investors can watch loans more carefully and in real-time. Tighter control and more visibility no longer is an option--it is a secondary-market requirement.

Microsoft[R] .NET[TM] technology provides the flexibility to continue to adapt to the latest nontraditional mortgage products. I believe systems designed for A-paper environments are not capable (or willing) to make the changes required by today's evolving origination sector.

Servicers today need a feature-rich system they can customize to meet their individual product and operational needs. The technology needs to support all levels of servicing and be appealing from a per-loan pricing perspective due to shorter development times and lower hardware costs. Even greater savings can be had from a hosted system--no information technology (IT) expenses equal additional savings.

The time is right to open the servicing world to all the players and let everyone in the game.

James Dowell is executive vice president and chief operating officer of MortgageFlex Systems Inc., Jacksonville, Florida. He can be reached at jdowell@mortgageflex.com.