Subprime Collection Tough As Ever
Companies are relying on expertise and turning to specialization to maximize
profits in the face of a changing landscape.
BY JOE CATON
Having now been through three economic cycles and having experienced the
best of times and the worst of times, subprime servicing professionals
can agree on this one thing - the collection process is no easier today
than it was in the past. Managing or servicing these high cost, high maintenance
loans involves a level of expertise that many have acquired only with
time and experience. Some servicing shops like Ocwen Financial Corp. and
Fairbanks Capital Corp. now identify themselves as subprime specialists,
while others have chosen to diversify their identity by assuming the description
of “special servicing” shops.
Regardless of the identifying mark, many firms now have become known in
the industry as maintaining specialized subprime servicing capabilities
- and they are expected to live up to these standards.
In times past, high levels of delinquency, default, loss severity and
foreclosure plagued the subprime lending industry, and was somehow accepted
as “the cost of being in the business.”
Today, however, the goal of subprime servicing is to attain a consistent
level of profitability in the face of thinner profit margins. The level
of competition has significantly reduced the attainable level of profitability
for subprime players, and most efforts to fatten the margins have been
met with allegations of predatory lending and abusive lending practices.
Richard Lee, a senior vice president of Fairbanks Capital Corp., addressed
some of the issues in subprime servicing before a group at the recent
Mortgage Bankers Association of America’s (MBA) subprime lending
conference. Lee and others on the specialized-servicing panel presented
some of the unique features involved in this sector. They singled out
a few developments that they collectively consider to be noteworthy.
Time lines
“One of the things that worked very well for us at Fairbanks,”
says Lee, “was to assign a loan monitoring and identification process
that can be traced across our various servicing departments. This did
not exist before, and made the subprime servicing process rather difficult.”
This observation is particularly important to understanding subprime servicing,
since these loans do have the tendency to move in and out of collection
or loss mitigation more often than their prime counterparts.
Many servicers will readily admit that time lines do go awry due to the
process of trying to internally identify and track loans across various
departments. Adds Ronald Faris, president of Ocwen Financial Corp., “You
would be surprised how far a distance that simple process goes in the
subprime servicing process - because of the high level of delinquency
management and loss mitigation efforts, the simple loan identification
process from department to department reduces the opportunity for delinquencies
to slip through the cracks and time lines to get fouled up.”
REO price achieved
Kyriacos Kyriacou, a senior analyst in the residential mortgage area at
New York City-based Moody’s Investor Services, indicates that his
group pays special attention to time lines in the specialized subprime
servicing process.
He points to these servicers’ ability to control the amount of time
spent in curing a subprime loan, or bringing it to a “successful”
resolution as a key component in their rating process. “One of the
best measuring rods for us in evaluating the performance of a specialized
subprime servicer is its ability to minimize time spent in delinquency
and default resolutions.”
He indicates that the very nature of subprime demands that the collateral
be managed efficiently and that strict adherence must be paid to time
lines. “In a close second place to this important factor,” Kyriacou
continues, “is the level of return achieved when a cure is not possible
and the loan goes to foreclosure.” Kyriacou’s views on the level
of return realized in the REO sale process are shared by every industry
participant, but the burning question is, How do they achieve both of
these desired results in the face of mounting delinquencies?
Moving quickly
Early intervention was cited as another major factor in successful subprime
servicing. Identified as the most recent marching orders for servicing
shops across the loan-type spectrum, they are more so the case in subprime.
Industry studies have clearly borne out the fact that earlier intervention
translates into a direct improvement in the bottom line. (See article
on P. !!) Because of the high occurrence of delinquencies and default
in subprime, the early intervention by the servicer has been proven critical
to the process.
Much of the success of that action can also be attributed to the relatively
solid real estate market and lower interest rates. “The critical
test for us in subprime,” notes Fairbank’s Lee, “will come
when the real estate market is not as firm as it is today and interest
rates are not as low.”
Over the past three years, servicing companies have become specialized
in the management of particular loans and portfolios. The subprime sector
has forced many of then to focus on the unique needs of the high cost,
high maintenance-loan servicing process.
To be considered a subprime specialty shop, one must now learn to work
in an environment of thinner profit margins, fierce competition for loan
take outs and loss mitigation expertise unique to this collection process.
With time, subprime collection will continue to improve - to the extent
that what we all know and call a subprime industry today may simply become
just another product line tomorrow.
This article was previously published in the June
2001 Issue of Servicing Management
