*The Elements of Special Servicing*
**By Steven Horne**
***Everyone learned in school about the four elements the ancient Greeks believed made up our world. Earth, air, fire and water show up in many ancient cultures as being the four critical elements of existence. We in the modern world, of course, understand that there are several additional elements that affect our daily lives, namely cable television and the smart phone, especially when used improperly by politicians and tabloid journalists. Ultimately all these elements, both the ancient and the modern, have a great deal of impact on the long-term success of the mortgage industry. Special servicers, however, have particular elemental priorities.
****Our mission is evolving very quickly. Just a few years ago, special servicers were called upon to take loans that were assumed to be beyond redemption and find ways to bring value back to them. Unlike the primary servicing model, this is not typically done with triage, but with long and involved treatments that can lead to lengthy success with workout scenarios. While this important work is still a major part of what we do, we also are heavily in the professional services business, which is a close and compatible fit for the special servicer’s skill set. Professional services include portfolio and process audits such as those as specified in the Interagency Review from last April from the Federal Reserve, the OCC and the OTS.
****Additionally, portfolio valuations and consumer complaint escalations have become part of the special servicing repertoire, along with other services that lenders and servicers are finding necessary. It all goes with the territory in today’s political, legislative and regulatory environment.
****In this new and evolved era for special mortgage servicing, I identify four very relevant elements that have the most to do with success in our mission.
****>> Clear objectives
****>> Sound methodology
****>> The right people
****>> The right technology
****First, clear objectives are not as obvious as they sound, and they are different for everyone. Special servicing’s clients may be servicers, lenders who may or may not be servicers themselves, mortgage insurers, investors in either individually owned or shared pools, and other stakeholders in the lending value chain. Large financial institutions are in the crosshairs for many at the moment, and more are needing third parties like us to provide neutral, detached and specialized expertise.
****While their specific objectives may be different, their overriding goals are to provide fair, legally sound lending services that create the most positive outcomes from difficult situations. This often means having special servicers working on recovering value from loans that are on the brink of foreclosure or are stalled due to robo-signing-caused legal delays. With average foreclosure time soaring to something around 500 days in some places, lenders are interested in exploring foreclosure alternatives that make sense.
****One such alternative is the facilitated short sale. More attractive than in previous markets, short sales are going from being a thorn in the side of servicing departments to a result that fits well into an evolving loss severity reduction plan. The problem has long been making them work in a timeframe that meets the objectives of buyer and their agents, and this has become a specialty of ours. Because special servicers understand the primary servicing process and the people who perform it very well, we are able to accelerate the short sale life cycle by as much as 50 percent. Buyers stay engaged and Realtors earn commissions, both of which are essential in achieving the shared objective.
****Sound methodology is a great deal more difficult than it sounds. Special servicing is far from generic, and methods and practices vary widely across the spectrum of those offering it. At the end of the day, people who are committed to their homes, neighborhoods and the single family residence lifestyle will go to great lengths to preserve their situations. They will sacrifice significantly and will bear almost any burden that maintains the lifeline to homeownership, even when they are underwater to a degree on the value.
****Our methodology is highly pragmatic and at the same time driven by our understanding of the borrower’s motivation. Not everyone can stay in their home, and when there is a low-equity, minimum-attachment attitude visibly apparent in the borrower’s communications, we start looking for other ways to minimize losses. Having a full range of options means having seamless communications with the owners of the credit risk, and that requires a methodology that is steeped in technology. Special servicers often deal with situations that require investigation, skip tracing and other means to obtain “right party contact,” and these steps are as much a part of the methodology as the softer skills used with motivated occupant borrowers. It is task and effort intensive, and without the right process in place, it can be prohibitively expensive.
****Most of what we do at Wingspan involves compensation driven by results, not by effort. Without the right methodology, it is very difficult to make money, regardless of demand for one’s services.
****The right people are the most critical component in our business. Those not familiar with special servicing might be surprised by that statement, but it is absolutely true because our business model is so different from those of the primary servicers.
****For example, instead of using collectors, we employ highly trained, highly empathetic professionals we call Loan Resolution Consultants. Our LRCs do not just talk the talk – they receive the main part of their compensation when they are successful in creating workouts that are sustainable, so they walk the walk every day. Although technology is very important in what they do, one technology they do not employ is telephone dialing automation. It is a timesaver in collection departments, to be sure, and that is precisely why we avoid it. People know when they are being called using a dialing system, and those who have spent months being pursued by bill collectors will use that knowledge to avoid taking another dunning call. The methodology that works best for us requires borrowers to communicate and our LRCs to listen, often at great length. We actually monitor calls to make certain enough time is taken with each, not to minimize call times like primary servicers need to. Once they understand the borrower’s motivation thoroughly and their levels of psychological equity, our associates stand a much better chance of gaining true commitments for long-term workouts.
****These are senior, very experienced people. Another aspect that differentiates them from primary servicers’ customer contact people is that they do not use scripts in their work with borrowers. As useful as scripting can be in many situations in servicing, we find in our more specialized environment that lack spontaneity and come across as too impersonal. In a process as personalized as ours, we want very close connections established between our LRCs and their borrowers, so we confine the use of scripts to the training room. It may be a numbers business, but people make the difference.
****The right technology has historically been a problem for the loan servicing industry. Primary servicers still operate using main platforms that were designed a generation or more ago and well before we saw mass delinquencies such as those we are experiencing today. In order to shore up those legacy technologies, servicers have many, sometimes hundreds of ancillary systems all working together. In special servicing, most companies have not had to deal with the older systems and have been able to build the ones that work for them. This has been a major boon for us, especially since default management technology has truly stepped up for this crisis.
****Our business model requires that we operate with great efficiency so we can save our most mission-critical human resources for borrower contact and specialized tasks. As a result, technology that can perform a wide range of repetitive activities is a must. The technology grants tremendous efficiency lift and keeps us focused on the important things.
****Earth, air, fire and water are integral parts of the real estate lending scene. But our four essential elements are more familiar business tenets that the entire industry deals with to some extent each day. In special servicing, we are providing more diversified services all the time, and keeping sight of the elements that make our missions achievable never ceases. We’re constantly refining, constantly improving – and that’s the most elemental aspect of what we do.
****ABOUT THE AUTHOR: Steven Horne is CEO of Wingspan Portfolio Advisors, LLC, based in Carrollton, Texas, and the COO of PROGRESS in Lending. A lawyer who has held senior positions with Fannie Mae, Sherman Financial Group and Ocwen, he is an expert in creating and executing strategies to mitigate losses in real estate portfolios of all types, with a specialized concentration in servicing’s most difficult area, defaulted and seriously delinquent loans.