November 2016 - End of the Road?

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24 | TH E M R EP O RT FEATURE function that incorporates CFPB compliance is critical. Investors view issuers and sponsors that have formalized loan servicing surveillance functions in a highly favorable manner; this places them at a competitive advantage for winning new business and retaining it. Servicer Surveillance Strategies T he most effective strate- gies for optimizing servicer performance incorporate col- laborative interactions between investors and servicers, includ- ing on-site audit reviews and ongoing performance feedback. By applying a consistent set of performance-based metrics to a portfolio, opportunities can be identified and recommenda - tions made that enable servicers to keep pace with the market while still improving perfor- mance. Reviewing and analyzing servicing data on a consistent basis allows for the identifica- tion of performance patterns, underlying gaps in procedural requirements, and overall pro- cess effectiveness. Servicing surveillance profes- sionals can provide assistance to servicers in achieving optimal performance by: • Emphasizing the importance of maintaining a consistent and simple process. • Ensuring a robust control and compliance environment exits. • Maintaining maximum borrower transparency. • Ensuring proper staffing is in place and robust training is provided. • Focusing on asset performance and key processing metrics to drive continuous process improvements. • Tailoring an approach to meet the individual needs of each servicer. Consistent management of a servicer in accordance with this criterion should result in mate - rial improvements in collateral performance, strengthen investor confidence, maximize cash-flow velocities, and reduce delinquen- cies and resultant loss severities. Effective Eyewitnesses S taffing is critical to the suc- cess of a servicing surveil- lance organization. Experienced professional staff having expo- sure to a variety of servicers and industry best practices is recommended. Generally, the experience level of professional staff encompasses two main areas: (i) default management (i.e. debt collection, loss mitiga- tion, foreclosure processing, bankruptcy, and REO admin- istration), and (ii) servicing operations (i.e. loan boarding, servicing transfers, cash applica- tions, investor reporting, escrow administration, mortgage insur- ance processing, customer ser- vice, and dispute management). According to one senior execu- tive at a mid-sized residential mortgage loan servicer in Texas, "Having an effective servicing surveillance organization staffed with a diverse group of experi- enced professionals is the cor- nerstone behind ensuring that servicers and sub-servicers alike adhere to procedures aimed at maximizing performance." Because both default manage- ment and servicing operations house functions critical to driving successful asset performance, they represent the foundation of a successful servicing surveillance function. Absent such a structure, the surveillance function may not perform optimally. In addi- tion, the most effective servicing surveillance organization operates best when it can draw upon past experiences and best practices followed by other servicers; this allows surveillance personnel to expediently identify problems, recommend potential areas for improvement, and provide ap- propriate remedies to servicers in order to optimize collateral performance. Independence is also critical so that servicer surveil- lance personnel maintain an "arms-length" standing at all times and are not influenced by inves- tors, issuers, sponsors, rating agen- cies, asset managers, or others. In Real Life F rom an audit perspective, on- site field reviews of servicers should be done on a rotating basis, generally every 12 to 15 months. These reviews are usual- ly initiated with a formal request for information to obtain data on items such as delinquencies, volumes, cash flow, foreclosure timelines, key performance indica- tors, organizational structure, staffing, turnover statistics, senior management biographies, and critical policies and procedures. Surveillance professionals should also request recent reports written by internal and external audit teams, regulatory agencies, and other critical third-parties (including investors) with correc - tive action plans as appropriate. When issues are identified, more frequent field audit reviews may be warranted. The results of these evaluations should be shared and discussed with servicing manage - ment. This in-depth field audit approach is critical in order to get a "hands-on" feeling for the servicing organization, its staff and culture, and the servicer's ability to work with borrowers to preserve home ownership. Surveillance professionals that are knowledgeable in differ - ent sub-specialties within both default management and servicing operations should perform these reviews. External vendors with specific subject-matter-expertise in certain defined areas (such as property valuations or property inspections) may be utilized as necessary to supplement staff knowledge and experience levels. Since most asset performance problems begin up-front with incomplete or incorrect loan boarding (either from new originations or from servicing transfers), boarding should be a major area of focus. As such, ser - vicing surveillance organizations should have resources intimately familiar with and knowledge- able about the process. Specific areas of focus should include timing and completeness of data received and entered into the un- derlying servicing system (such as borrower contact telephone numbers). Loan boarding is often overlooked when analyzing the cause behind loan delinquencies; however, gathering information correctly at the beginning of the process is critical in helping "Having an effective servicing surveillance organization staffed with a diverse group of experienced professionals is the cornerstone behind ensuring that servicers and sub- servicers alike adhere to procedures aimed at maximizing performance."

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