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FEATURE Lehman Brothers Bancorp Inc. This sale of servicing rights to Nationstar is part of the wind-down of Aurora Bank and Aurora Loan Services, which ultimately is expected to help provide $1.5 billion to creditors of bankrupt Lehman. As of early August, Nationstar Mortgage was still in the bid- ding for the servicing business of ResCap, with Warren Buffet the other prime bidder. At least one published report said that Ocwen might also be interested, though Alverson doubts that Ocwen has the capacity to han- dle the entire ResCap portfolio. Nationstar, on the other hand, has plenty of unused capacity, Alverson says. There may also be a trend "If a lender retains the servicing rights, he is retaining a boatload of money. I think as more loans get refinanced, more servicing will be retained." toward deconsolidation in the not-too-distant future, according to Lykken. "If a lender retains the servicing rights, he is retaining a boatload of money. I think as more loans get refinanced, more servicing will be retained," he said. Retaining the servicing on loans held in portfolio gets better accounting treatment than ser- vicing rights of securitized loans. Lykken expects more loans to be held in portfolio in the future due to business and regula- tory considerations. He and McDonald expect more growth of middle-market servicers in ad- dition to the larger servicers. Even some smaller lenders feel — David Lykken, Mortgage Banking Solutions delinquent "unless you have a strong default management op- eration. If you don't know what you are doing, you are better off using component servicers." Importance of Component Servicing an excellent default servicing group," Stitt said. "There are a lot of other lenders who have built their whole servicing operation around the person who pays." He warned against continu- ing to service loans that become 30 | THE M REPORT they have the skills and capacity to service the loans even if they do become delinquent. For example, Tulsa, Oklahoma-based Gateway Mortgage Group has built a servic- ing portfolio of $2 billion, says Kevin Stitt, president and CEO. While most of that volume is the company's prime loans, there is some distressed debt as well. "We are very fortunate to have L sourcing many pieces of the servicing process, according to Steven Horne, president and CEO of Wingspan Portfolio Financial Advisors. "It's a way for them to provide additional capacity, focused expertise, and 21st century technology when they don't have those types of resources in house." In this way, the residential enders retaining servicing rights are selectively out- to provide quicker response and bring in additional areas of ex- pertise than they could do with in-house resources. "There's a real emergence of the multi-party arrangements, in which stakeholders take on their own credit or insurance risk and use Wingspan to augment their offering or reduce their exposure the performance of the primary servicers," Horne added. Primary servicers generally have lending industry is following a model that the commercial lend- ing industry has used, according to Horne. By taking advantage of outsourcing, lenders are able not going to be able to be able to work with every type of loan for and every type of delinquency (e.g., 90 days delinquent, nearing foreclosure and those in be- tween)," Horne said. In order to properly service the expertise and tools necessary when loans are performing as expected, Horne says. However, primary servicers benefit from specialized assistance when ill- equipped loans fall into delinquen- cy. Delinquent loans require more expertise and tools to manage than the top-performing loans. "The primary servicers are the delinquent loan, it needs to be much more closely managed, according to Horne. "The optimal strategies for delinquent loans require a very high-touch approach," he said. "You have to know minute-by-minute what is going on with every loan in the portfolio." Horne adds that primary servicers are entrenched in a model that worked for a long time but are ill-equipped to handle on their own some of the significant long-term changes that have arisen in the industry. As a result, property owners who would buy properties with the anticipation of selling them in a short period of time are now buying and renting properties to people who might be in the rental market for 10 to 15 years or more. As a result of the mortgage and real estate industry meltdown at the end of the last decade, for example, there's been a significant shift from the typical migration of short-term renters to homeowners to a much larger base of long-term renters who either have little interest in homeownership or will not have the finances for homeownership for several years. Unlike the majority of rental relationships in the past, a large percentage of the new ones involve owners who have a large number of properties across several states, rather than just a few local properties, as had been the norm. "The need to service those rental relationships is very large," Horne said. "This requires the latest technology and high-end customer contact." Horne expects the trend of outsourcing component servicing to continue to grow. "The largest services have been asked to do things that are too expensive for a traditional servicer to do, so they have to make rational business decisions," he said. "We help them clean up their portfolios."