Beefing Up Short Sales Bids With Expertise And Effort

Unlike with Uber and the ride-sharing revolution happening, there is no easily downloadable short sale management “app” that is going to instantly save you a lot of money and dramatically simplify your default servicing operation.  If someone creates one, they will be rewarded much like the founders of Uber because the problems plaguing servicers across the country are still widespread and increasingly complex. Servicers are more eager to avoid foreclosures than ever given extended timelines and high severities. So short sales are clearly an attractive alternative in many situations, but one of the biggest problems we see with short sales today is that original marketing plans start out way too low.  This occurs for a variety of reasons that evolve over time. However, the most effective strategies for elevating those marketing plan levels comes back to applying two old-fashioned solutions; expertise and effort.

The first challenge in avoiding under-valuing your property is understanding when a short sale should really be a deed-in-lieu of foreclosure so that you can make valuable repairs. The initial step is doing internal BPOs on every potential short sale opportunity so that you can begin to understand what, if anything, the house needs to make it eligible for FHA financing or to otherwise maximize value in a specific neighborhood. The servicer can then leverage the experience of the REO management team to assess the optimal strategy for the property. This is a point in the process where many property owners leave a lot of money on the table. We often spend tens of thousands of dollars when it makes sense from an ROI perspective. REO managers have become too focused on inventory management and too accustomed to sell “as-is” due to the priorities associated with the housing crisis. They need to re-discover the art of making impactful property improvements. It isn’t easy and it will usually take a few months, but the right servicer-REO manager combo can identify and execute on market-savvy rehab work that adds meaningful lift to the tail end of a disposition.

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Effectively managing remediations can also keep you from listing properties too low. Many multi-unit properties in default are occupied by tenants and the landlord/owner (borrower) is uncooperative or absent. If the property has been identified as an at-risk property the owner can incur code violations for allowing the property to show signs of physical distress. Certain municipalities will fine the owner for providing services to the tenant for maintenance issues as minor as unclogging toilets or sending a locksmith to let a locked out tenant in the building. Often mortgagors can’t afford the upkeep or ignore remediating the complaints so the code violations can add up quickly. In these situations the servicer can save the note owner a lot of money by spending the time and using their expertise to carefully evaluate a prospective buyer’s remediation plan. Typically it is investors looking to rent or flip the property who are the natural buyers of homes requiring remediation plans given the added complexity and capital involved in the transaction. This makes sense and these buyers should be pursued if the plan is fair to the seller. But if the investor is asking for too much the servicer should be able to recognize it and step in. The servicer would then remediate the violations on its own to clear the items and likely end up selling the property at a better overall execution level.

Another pervasive challenge is the idea that a discount is always warranted simply because it is a short sale and the buyer will have to endure the pain of working with a large bank. But smaller and more nimble special servicers and their agent networks have developed skill sets doing short sales and even more specifically in 2nd lien negotiations and HAFA payouts given the volumes they have processed in recent years. They know who to call and how to facilitate a deal quickly at with the 2nd lien holders since those loans are highly concentrated among a few lenders. It just is not as slow and painful as many agents and borrowers assume with more counterparties today and it is servicer’s job to convincingly educate borrowers and on the under-appreciated efficiencies in the market.

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The last challenge to short sale marketing plans (which I have room for in this column) is an ugly one; fraud. It is frighteningly common to see fraud where the borrower is in cahoots with an agent and a buyer (sometimes the borrower is actually also the new buyer) and they manage a short sale at a deep discount to market and then end up flipping the property three to six months later a much higher level. They will do “pocket listings” where they claim to have private showings and keep the property off the MLS. Others will flat out just ignore calls from the legitimate buying agents. The best way to fight this is to establish and use a trusted agent network. Another path is to demand that your properties are listed on the MLS. The MLS automatically feeds sites like and Zillow in many areas which gives you an easy check. Lastly, whenever possible have someone local be sure there is a for sale sign on the property.

So you may not get all the way to an uber-esque valuation, but with some industry knowledge and attention, higher short sale executions are on the horizon.

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Good Companies Benefit

We hear a lot about bad mortgage services these days. But that’s not the norm and the good services are actually growing. For example, Fay Servicing, a special servicer and mortgage originator, is growing its private-label securitization (PLS) business with strong deal flow and re-affirmed servicer ratings.

Since late 2013, Fay Servicing has been designated as the servicer on six PLS transactions backed by over $1.2 billion in mortgages including re-performing, non-performing and new issue prime jumbo products.

In November, Fitch Ratings affirmed Fay Servicing’s Residential Subprime and Special Servicer Ratings of RPS3 and RSS3, respectively, with an updgrade to “Outlook Positive.” Additionally, Standard & Poor’s reaffirmed Fay Servicing’s Residential Subprime and Residential Special Mortgage Loan Servicer ranking of average and “Outlook Stable.”

Fay Servicing’s PLS business includes both rated and unrated deals and it expects to see more seasoned product being rated in 2015, offering a deeper product range for institutional investors. Fay Servicing will apply the same focus on alignment of interests and investor transparency to the privale-label sector that it has historically provided to the whole loan sector.

“In today’s mortgage environment, there is a strong appreciation for a servicer that can optimize loan value for investors with a borrower-centric approach driven by higher cure rates and fewer foreclosures,” said Ed Fay, CEO of Fay Servicing. “It is exciting that investors and banks recognize that our unique relationship-based servicing platform provides a different kind of borrower experience, ultimately giving our clients an edge in both legacy and new origination private-label deals, where we expect to see meaningful growth in the years to come.”

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Bankers Want Their Servicing Ops To Be Less “Special”

As more and more statistics come out showing lower delinquency percentages and decreasing foreclosures, many mortgage bankers are asking themselves if they really need a default or “special” servicing operation. The passing of Dodd-Frank and the birth of the CFPB have dramatically changed the landscape of default servicing, particularly now that the new servicing standards are in effect and being strictly enforced. What many banks have come to realize is that the costs and risks associated with running a default servicing platform today are simply just not worth taking on in-house.

A bank’s core competence, in most cases, is its ability to measure risk and make intelligent loans to its customer base. However, today, an effectively run default servicing operation can draw excessive amounts of precious time, talent and capital away from a bank’s key lending efforts. Most banks’ troubled loan portfolios are shrinking yet cost structures are moving in the opposite direction. It can be a multi-million dollar undertaking to manage even small portfolios when you look at both the operational and compliance components necessary to establish the appropriate compliance regime and then to be able to stay current with ever-changing regulatory standards and government borrower relief programs. Policies and procedures must change, technology needs upgrades, more staff is needed to execute the new procedures and more managers are needed to monitor and administer the operation. At the same time, the penalties for missteps can be large and the mortgage industry is still struggling to truly understand what they will actually be.

It is also important to consider negative exposure for the brand. When the hard cases arise and foreclosure is a likely outcome, many banks are choosing not to fight those battles and face the potential negative headlines, and are placing that responsibility with another institution with a strong track record and deep experience handling the toughest cases. Many banks are saying they have enough headline risk and the reward of holding on to the servicing simply is not justified.

There are other financial reasons for banks to lose interest in servicing. It is well understood in the industry that mortgage servicing rights (MSRs) will receive weaker capital treatment under BASEL III. Specifically MSRs will cap out at being 10 percent of a bank’s common equity Tier 1 capital and any MSRs that are not deducted from a bank’s common equity Tier 1 ratio will move from being a 100 percent risk weighting to a much more punitive 250 percent risk weighting. The effect of losing this powerful capital ratio enhancement is certainly taking meaningful luster out of the MSR value proposition for banks relative to other assets.

A second and more immediate benefit to exiting servicing is the actual sale price of the MSRs (received at origination or after some degree seasoning), which are trading at a premium to historical levels given the low interest rate environment and the market’s rabid search for yield right now across the credit spectrum. Many bankers are addressing origination volume shortfalls by taking advantage of the strong investor demand for MSRs and their intrinsic interest rate hedge. MSRs are being bought into very leverage-friendly structures and investors continue to bid up the asset class. Bankers are also taking notice that they can offload costly servicing obligations by selling both performing and non-performing whole loans, which are each trading at high levels (as a percentage of UPB and property value), as well. For example, a June HUD non-performing loan sale resulted in most of the pools selling in the mid-high 70s as percentage of BPO (broker price opinion or essentially a quick sale property value). For many banks that represents a much more attractive resolution than managing the delinquent loans themselves over a long period of time. Instead they would much prefer to move on and allocate that capital in an asset more closely tied to their long-term growth plans.

Strategic human resource allocation, brand protection and maximization of capital in the midst of a hot MSR/whole loan market are all themes that are forcing bank executives to re-assess the optimal strategy for their servicing (particularly their default servicing) operations and the assets they manage. The mortgage sector can move quickly and then inch along quite slowly, so it is wise to constantly gauge where your business is headed relative to the market, enabling you to make the right decisions for your institution no matter what environment you face.

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Special Servicer Expands In Dallas

Fay Servicing. a special servicer that manages residential mortgages, announced that the company has opened an office in the Dallas metro to take advantage of the tremendous talent available in the region.

Fay Servicing’s staffing model is based on hiring former loan originators and leveraging their strengths via the its unique training program designed to transition them into special servicing account managers. These employees typically have extensive mortgage industry knowledge as well as the interpersonal skills to required to successfully engage borrowers and help find positive resolutions for troubled loans.

“As we grow, we continue to focus on hiring account managers who are natural problem solvers with exceptional mortgage industry expertise” said Ed Fay, chief executive officer of Fay Servicing. “Given the recent employment trends in the Dallas region, it was a perfect fit for executing our specialized approach of bringing strong originators into the servicing role while also enhancing our business continuity capabilities.”

Chicago, Ill.-based Fay Servicing is a special servicer which leverages its relationship-based servicing platform to optimize performance of residential loan portfolios for banking institutions and alternative real estate investors.

Rating Agency Scrutiny

We are all under pressure each and every day to be the best that we can be. And with all this new regulation, that goes double for lenders and servicers. I just heard that Fay Servicing, a special servicer that manages performing, at-risk and distressed residential mortgages, has been evaluated and rated by agencies Fitch Ratings and S&P, independent research firms which provide ratings, commentary and analysis to organizations across the financial industry. Their technology played a hefty role in the rating agencys’ verdicts. Here’s what happened:

These ratings were partially determined based on the company’s use of a robust single point of contact (SPOC) system as well as the level of advanced servicing technology integrated into its operations. The results reflect the firm’s innovative relationship-based servicing approach which is driven by the staff’s extensive mortgage industry experience and highly developed borrower management skills. The ratings incorporate the general condition of the U.S. residential servicing industry, as well as the degree of difficulty in maintaining high performance standards given the rising cost of servicing and more demanding regulatory requirements. These ratings also highlight Fay Servicing’s business model, which facilitiates a high rate of positive resolutions for homeowners, while maintaining profitability for investors, banks and lenders.

The Fitch Residential Subprime and Special Servicer Ratings were RPS3 and RSS3, respectively, with “Outlook Stable” (proficient in overall servicing ability). The S&P Residential Mortgage Subprime and Special Servicer Rating was AVERAGE with a “Stable Outlook.”

“We are proud to have received these ratings especially at a time when the U.S. servicing industry continues to evolve in order to successfully face a variety of challenges associated with added regulations and changing market conditions,” said Ed Fay, chief executive officer of Fay Servicing. “These results validate that we’ve built a strong foundation for future growth, including securitizations, and that we will continue to responsibility and effectively serve homeowners, lenders and investors for years to come.”

Having heard that, you should be recognized as well for all the good things that you’ve done for the mortgage space this year. Now is your chance. Apply for free to be named a Top Innovation by PROGRESS in Lending HERE.

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Try A New Business

*Try A New Business*
**By Tony Garritano**

TonyG***If your concerned that the rise in rates is going to negatively impact your bottom line, I have a suggestion. A lot of originators are looking to get into servicing to make up the difference, and there are companies out there interested in helping originators make this leap. For example, Fay Servicing, a special servicer that manages distressed and at-risk residential mortgages, has launched an initiative to create strategic partnerships with mortgage lenders to help train origination staff for a career in the servicing industry.

****The program provides training to hone key skills such as managing initial calls with borrowers, refining listening skills, meeting all applicable compliance requirements and conducting a Personal Budget Analysis (PBA) for borrowers.

****Fay Servicing has developed an employment model that seeks professionals with extensive mortgage expertise combined with borrower engagement skills, enabling them to successfully work with distressed homeowners to avoid foreclosure. Relationships with lenders that are downsizing origination staff allow the company to attract the next generation of special servicers.

****“These strategic alliances with mortgage lenders provide a new career option for origination staff who are seeking positions in the servicing industry,” said Ed Fay, chief executive officer of Fay Servicing. “And act as a way for the mortgage industry to shift its collective resources to related sectors where there is substantial growth.”

****Mortgage originators interested in learning more about opportunities at Fay Servicing should contact them at

Training Is Very Important

*Training Is Very Important*
**New Policy Emerges**

learning***The servicing space isn’t for the un-educated. It takes industry knowledge to do this kind of work. To this end, Fay Servicing, a special servicer that manages distressed and at-risk residential mortgages, introduced its new employee training program for its recent hires, which focuses on how to foster closer relationships with borrowers, staying in compliance and leverages the knowledge and skills new-hires possess given their previous loan origination experience.

****The program occurs at the company’s corporate headquarters in Chicago and offers instruction on a variety of key skills, such as managing the initial call with borrowers, refining listening skills, meeting all applicable compliance requirements and conducting a Personal Budget Analysis (PBA) for borrowers which helps to engage the borrower and establish affordability.

****Fay Servicing employs servicing professionals with prior loan origination experience, which enables the company to quickly begin more advanced training in distressed servicing. Each training class is kept relatively small and new account managers are trained by staff who have already successfully completed the transition from originator to servicer.

****“By selecting employees with previous experience in the mortgage industry, we are able to focus our time on the necessary skills that will make them special servicing experts,” said Ed Fay, chief executive officer. “Experienced and well-trained staff have fueled our growth during the past several years.”

Dressed For Distress

*Dressed For Distress*
**By James Comtois**

JamesC***It is definitely a good time to be servicing distressed residential mortgages these days. (It’s actually also a good time to be servicing and investing in distressed properties of all types these days, but that’s another story for another day.)

****Just ask Fay Servicing. Thanks to its specialty of managing distressed and at-risk resi mortgages, the Chicago-based special servicer is in quite a good place. Oh, it’s also doing well thanks to its staffing model, to be sure. But it sure hasn’t hurt that its business model focuses on a business that currently is booming.

****In the wake of dramatic growth in 2012 and in the first quarter of 2013, Fay Servicing, whose customers include banking institutions and alternative real estate investors, announced a hiring initiative in May that was implemented to entice college-educated mortgage professionals with origination experience to join the firm’s team in Chicago.

****The five-year-old servicing firm has opened its second office, a 10,000-square-foot space in Oakbrook Terrace, Ill. It’s also initiated plans to double the number of its employees from 100 to 200 by year’s end.

****So how has the hiring initiative been going since it was initially announced?

****Ed Fay, founder and CEO of Fay Servicing, told me that, as of June, the firm’s expansion plans were right on schedule. Since the release was sent last month, the firm has added 20 people to its staff so far, and he expects to have at least 20 more people by next quarter.

****“The execution has been very good so far,” Fay said, noting that the firm, which deals exclusively with whole loans, could grow even faster, but that would prevent it from properly training its new staff.

****Fay also pointed out that his firm’s staffing model is somewhat different from other servicing companies in that it focuses on attracting mortgage professionals with loan origination expertise, typically from large lenders located within the Chicago area. In other words, the firm is interested in hiring people who used to be on the sales side of the business.

****“They can empathize with customers,” he added. “Customers aren’t looking for handouts; they’re looking for a hand.” Well said.

****And why has the firm been doing so well? It’s not just its hiring model that’s enabled the company to see considerable growth over the past several months. It’s also helped that the distressed space is growing in popularity among banks, REITs, private investors and insurance companies.

****As we all know, the spectrum of distressed products are constantly expanding—whereas only a few years ago ‘distress’ used to simply mean loans that were nonperforming, it can now run the gamut of nonperforming, nonprime and even performing, but with something odd about the loan (in fact, a good portion of the loans that come to Fay’s attention are performing, but are considered distressed simply because there’s something concerning about them). And this plays right to Fay Servicing’s niche.

****So with the demand for servicing distressed loans still on the rise, it appears as though that Fay Servicing is continuing—and will continue—to see favorable growth. In fact, by the end of the first quarter of 2014, Fay plans on growing the staff to 210 professionals.

****“When it comes to distress management, you need to have the best people for the job,” Fay added.

****ABOUT THIS NEW COLUMN: James Comtois has been a financial journalist for more than 14 years and has covered the real estate and mortgage industries for more than eight of those years. He has written for such publications as Crain’s New York Business, MarketWatch, Private Equity Real Estate News and National Mortgage News. He lives in Brooklyn, NY. In this new monthly column for PROGRESS in Lending he’ll share his take on the industry with you.