November 2016 - End of the Road?

TheMReport — News and strategies for the evolving mortgage marketplace.

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22 | TH E M R EP O RT FEATURE O ver the past decade, the mortgage in- dustry has become increasingly more aware of the need for sound and prudent resi- dential loan servicing practices to help better manage risks, maximize cash flows, and mini- mize defaults. Investors, banks, issuers, sponsors, GSEs, rating agencies, and other regulatory bodies, and pertinent third-par- ties all recognize the critical role loan servicing plays in helping maintain and improve loan per- formance. As such, a great deal of emphasis now exists across the industry toward having a strong servicing surveillance/ oversight function that can play the role of "watch-dog'' over loan servicers in order to safe- guard consumers from inappro- priate and unsuitable practices. Effective surveillance has been shown to foster greater com- pliance and lead to improved portfolio performance through more active management and mitigation of risks. The end result: An overall reduction in loss severities. One prominent industry leader, now a senior executive at a major U.S. rating agency, makes his sentiments very clear: "Proper surveillance of mortgage servicers is an absolute necessity—end of story! Had a more extensive [servicing] oversight function been in place across the industry back at the height of the collapse, many improper actions taken [by servicers] against consumers, such as robo-signing and dual tracking, would [most likely] have been detected early-on, and would not have prevailed, and overwhelmed the industry. There would have been less havoc wreaked on critical processes like foreclosure and loss mitigation, and in all likelihood, fewer loan losses may have resulted, thereby positioning many servicers to better weather the storm." Investors who have incurred losses now look to the role resi - dential mortgage loan servicers play in helping manage loans and curtail/minimize defaults. Prior to this decade, investors seek- ing recourse for damages they incurred focused primarily on loan origination and underwriting malfeasance in order to identify fraud or representation and war- ranty breaches related to defaulted loans. Over the past several years, however, the emphasis associated with loan origination fraud and underwriting malfeasance has shifted, with greater focus now being placed on loan servic - ing and the corrective measures servicers can take to address shortfalls and ultimately reduce loss severities. Sound and prudent business practices advance the need for in- creased servicer vigilance across a wide range of key servicing func- tions. Best practices for servicing surveillance start with a proac- tive program to monitor servicer performance. Investors and other third parties want to ensure a formal servicing surveillance func- tion exits, with a primary goal of maximizing cash flows, mitigat- ing loss severities, and ensuring proper liquidity is maintained over servicing assets. Catering to the Industry Watch Dog A servicer's overall compliance with regulatory standards is critical. The prominent industry leader quoted above goes on to say that "many of the protec - tions outlined by the Consumer Financial Protection Bureau (CFPB) relate to common sense practices that sound servicing oversight functions should in- clude." Clearly, compliance with guidelines established by the Fair Credit Reporting Act, the Real Estate Settlement Proce- dures Act, the Truth-In-Lending Act, and the Fair Debt Collec- tion Practices Act—to name only a few—is essential; failure to do so potentially inhibits the bor- rower's ability to pay, thereby creating processing challenges for the servicer that, if not effec- tively dealt with, may adversely impact a servicer's reputation (as well as its bottom line due to the potential imposition of fines and penalties). Recently issued standards from the CFBP touch on a variety of key servicing functions, includ - ing but not limited to, areas such as: foreclosure processing, billing/ payment processing, collections, proper/timely handling of bor- rower complaints and disputes, escrow administration, early intervention with delinquent bor- rowers, loss mitigation practices, bankruptcy administration, and force-placed insurance. CFPB's goal in issuing these guidelines was to prevent borrowers from receiving unwelcome surprises, to put the "service" back into mortgage servicing, essentially. More important, the guidelines were written to assist borrowers with maintaining home owner - ship, preserving their ability to pay, and ultimately averting losses. Limiting losses is "near- and-dear" to an investor's heart; therefore, establishing and execut- ing a sound loan surveillance Servicing Surveillance Benjamin Franklin's adage, "An ounce of prevention is worth a pound of cure," rings true in today's servicing environment. By Vincent Spoto

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