Stressed Servicers Speak

Subprime conference panel

May 25, 2007

By NEIL J. MORSE

With the first ripples of an expectedly large reset wave just hitting shore, companies like Option One Mortgage Corp. and EMC Mortgage Corp. vigilantly watch for first signs of trouble to keep accounts from turning delinquent or, worse, skidding into foreclosure.

Executives from both companies along with a New York ratings agency director shared their insights at a subprime conference in Las Vegas earlier this month.

“These are very difficult times for servicers,” lamented Teji Singh, chief servicing office at Irvine, Calif.-based Option One. She reported her group is working harder these days with investors, borrowers, associates and others to avoid foreclosures. “The last thing you want is 10,000 REOs [real-estate owned properties] on your books because they’re not going to sell.”

Lewisville, Texas-based EMC Mortgage also is bearing down on rising payment problems.

“We’ve gone old school,” said John Vella, president and chief executive officer. He decried the “fancy technology and processes” of some servicers, insisting that the best approach “starts with contacting borrowers.

The new philosophy in this market,” he said, “is asking how to get loans worked out with people eye-to-eye. The days of calling [late-paying] borrowers and sending letters, thinking they’ll pick up the phone or answer their mail, are over,” declared Vella, noting that EMC pursues “creative approaches to get a hold of borrowers.”

Applauding that approach, Diane Pendley, managing director, operational risk group, structured finance, Fitch Ratings, New York, N.Y., acknowledged “anyone in the market [today] has to … be inventive and proactive,” because the “extent of the [reset] problem is starting to become very apparent to everyone.”

What all are realizing, according to Pendley, is that “underwriting parameters were pushed” and, as a result, “servicers say they’re underwriting [these loans] for the first time.” Much of the fraud that has occurred, says Pendley, would have been caught “if underwriting had been done in the old fashioned way.”

Instead, she says, “a majority of subprime loans today were originated with at least one high-risk factor.” And, that cannot be corrected with “constant refis” anymore because “brokers have no place to put them today. The ride is over; borrowers will have to stay in these transactions.”

Option One’s Tingh says servicers saw this coming. “You see the perfect storm faster than the origination side.”

Indeed, her colleagues began “seeing early payment default rates going up, and hearing borrowers were overstretched, as early as last fall. By January, the whole industry knew we were on fire.” To meet the challenge, her company is doing things such as providing problem customers with cell phones that only can be used to call Option One.

She says some servicers are finding it difficult to cope with the current environment. “The piece missing is training; half the lenders are going offshore today” for servicing work [bit] that approach fails if it is halfhearted.”

The ratings agencies approve of this strategy, according to Pendley of Fitch, but with reservations. “If a company outsources in a staged and methodical way [it can] work. We hear of servicers who would never do it and others who have tried and failed.”

What outsource companies do directly impacts the servicer and that is reflected in the servicer rating. Fitch rates 23 sub-servicers and has had to downgrade six for inadequate practices. “Most sub-servicers need to staff up with experienced individuals,” she advises.

Neil J. Morse is a communications consultant and independent writer working exclusively in the mortgage finance industry. He resides in Newtown, Conn., and may be reached by e-mail at: [email protected]