Servicing Cost Squeeze Could Prompt Innovation

The cost to service a loan is minimal so the top servicers tend to stick with their servicing systems for a longer period of time. However, with defaults rising, the cost to service a loan will increase, which vendors in this space say will make way for innovation to drive greater efficiencies. "For example, we’re seeing momentum on data and standards." pointed out Mary Hunter, chief executive officer of default automation vendor ACEX, Chicago. "Servicing has always been behind origination. However, with MISMO we’re now seeing a push to standardize servicing data elements.

"We as vendors are also being pushed to be more collaborative. Servicing is also becoming more consumer oriented. A lot of people are using the Internet to pay for their mortgage, as an example." she noted. "I’ve actually been paying my mortgage online for several years. So, we have more data to focus more on loss mitigation as a result.

"With this data we can do a more accurate predictive analysis. We’ll also see more strategic alliances coming in 2007. The industry is moving to an end-to-end system. Vendors realize it’s cheaper to form a strategic alliance and integrate using Web services and MISMO." said Ms. Hunter.

But will the big servicers be willing to give up their older systems? "A lot of the big players are looking for new systems and add-ons to existing systems," answered Ms. Hunter. "They’re looking for .NET, Web services. etc. Lenders throw most of the money at origination because that’s where the money is created. Because implementations and data management has to be in real time you’ll see systems that use new technology winning because the old systems can’t do that

"For example, people will know where to send their payments and what they need to do in default 24/7 electronically." she explained. "It’s exciting to see a greater interest on servicing technology. The refi boom is over and the ARMs are coming due so we’re going to see an increase in default. The big players are realizing that they have to update their technology to compete. Whoever can do it faster, better, cheaper will win.

"Because of this shift in the market we’re starting to mine data on the servicing side and do something meaningful things with that data," Ms. Hunter said. "For example, performance ratings are important on things like collection practices. Technology is being used to keepup on the performance of the servicer’s business partners as well. They’re also using that data in recruiting new vendors."

"The biggest element to servicing technology today is defaults." said Duke Olrich, founder, president and CEO at DRI Management Systems. Newport Beach, Calif. "That will be center stage for the next year to year-and-a-half. Folks handle between 800 to 1,000 files a month normally and only 200 default folders. So, there’s a need to increase technology efficiency so folks can handle 300 to 400 folders a month per FTE.

"We have attorney interfaces so we’re becoming more efficient there. We’re also good at interfacing with brokers. For the next two years we’ll see more rules-based decisioning technology enter this arena." he predicted. "For example, we’re building a rules-based pre-foreclosure system. In pre-foreclosure you have even more folders because you’re deciding at this point where to put that folder. It’s a very manual process. Our new system will only send out 10% of those folders to be looked at vs. the 50% to 60% that are sent to a live person today.

"We’ll automatically get in appraisals or BPOs and use rules to determine the next stop. We’ll use the Web more and more as well. There are several vendors that offer second trustee analysis for example, so we’ll hand off to them via a Web service. Overall, it’s going to be more about integration with the outside world."