July 2012

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FEATURE SERVICING Learn Before the Market Turns Lessons to What residential servicers can learn from today's commercial real estate industry. By Brian A. Lee T S often severe sea of servicing issues, mortgage companies are wise to peel back the layers to find their likes and accompanying lessons. Two areas in which residential servicers are learning from their commercial counterparts are special servicing and the single-point-of-contact approach. Specialized Style mercial world, where once a loan becomes high risk or in default, it moves to a specialized work- out group or an altogether differ- ent mortgage entity. Depending on the pooling and servicing agreement between the invest- ment trustee and the master servicer, special servicers could obtain the loans themselves or just the servicing rights. On the residential side, the pecial servicing has always been a mainstay in the com- path was much more simple and 54 | THE M REPORT he differences between a $20 million office building or a massive retail development and a suburban single-family residence are easy to see, but in navigating an office. "You didn't have to be that complex at offering a bunch of different workout options because things were pretty easy. Then the world after 2007 changed as we knew it, and everything became more complex." Suddenly, with the plummet- foreclosures, bankruptcies, and litigation. Largely built in the com- straightforward. Until the hous- ing downturn, that is. "Traditionally, a lot of the ing housing market, residential servicers had to figure out how to handle loss mitigation and get cre- ative with workout strategies, all while staying ahead of the tidal wave that was the unprecedented volume of distressed loans. "With this whole idea of prime residential servicers did cradle-to-grave servicing internally, but when delinquencies were only 1 or 2 percent and defaults were a half percent a year or so, you could handle that internally and you had a very forgiving hous- ing market so you didn't have to be the most efficient at your workout strategies," said Jeffrey Levine, Milestone Advisors LLC's senior managing director who runs the firm's mortgage banking advisory practice from its Miami special servicing with the default and loss mitigation focus, there's been a lot learned from the com- mercial side in having a team or a company focused exclu- sively on that core capability," said Levine, who estimates the time Milestone Advisors splits between the two sectors at 60 to 70 percent residential. Special servicers can offer unique expertise like managing delinquency, assets tied to de- faulted loans, and foreclosed real estate assets, as well as maximiz- ing recovery in complex transac- tions involving modifications, dential servicing systems were real- ly built around batch processes—it's really a 1970s technology that's very good at storing lots of data and do- ing lots of cash payments, routines, and form letters, but they're not very robust from a data-mining standpoint and portfolio analytics. So a lot of people have had to build a lot of workarounds and separate tools and subsystems. The residential servicing technolo- gies are starting to catch up with the nimbleness and robustness of the commercial side." mercial world, net-present-value (NVP) models are now fully de- ployed in the residential servic- ing market to help determine the expected value of holding a loan for workout versus foreclosing versus putting the borrower on a repayment plan. NPV provides a sound base for developing so- phisticated analytics to formulate a servicer's workout strategy "as opposed to what historically had been a more informal, seat-of-the- pants approach," Levine said. He continued, "Also, these resi- SECONDARY MARKET ANALYTICS SERVICING ORIGINATION

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