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B&C Servicers Face Day of Reckoning
By Ted Cornwell
As the nonprime mortgage industry goes through its trial by fire, not much attention has been paid to the loan servicers who will have to clean up the mess. Yet.
But with companies failing and Wall Street putting back loans or cutting off lines of credit, the servicing side of the business is likely to come under renewed scrutiny.
In years past, servicers got their share of unwanted headlines when companies such as Fairbanks Capital were accused of overly aggressive or downright improper collection and default management practices. Some thought subprime servicers were too aggressive about charging late fees and other aspects of default management. But with the default rate skyrocketing on nonprime loans, servicers will once again be called upon to limit losses by keeping foreclosure times within reason and going after collectable debt. We'll see how it plays out.
But some MBA data has both good and bad news for nonprime servicers. On the plus side, data collected by the MBA show that nonprime servicers have done a good job of managing default-related costs. On the negative side, a top MBA researcher says the data suggest that nonprime servicers have yet to achieve the economies of scale that mega-servicers of prime quality loans have achieved.
In 2005, the direct costs of servicing a subprime loan totaled $725 per loan, according to the MBA's servicing operations study. The average cost of servicing a prime loan was $476. Marina Walsh, director of industry analysis in the MBA's research and business development office, said that nonprime servicers often face costs that are about three times as high as the most efficient mega-servicers of prime loans.
But she said the cost differential diminishes in the area of default management, probably reflecting the expertise that servicers of nonprime loans have in this area.
Looking at default management departments, the MBA study found that prime servicers as a whole managed 159 defaulted loans per employee, while subprime servicers handled 132 per employee. Prime servicers as a group averaged a default cost of $648 per loan, whereas subprime servicers averaged $738.
And with defaults rising, Ms. Walsh said that the expertise nonprime servicers have in this area may become even more valuable, especially if prime borrowers find themselves overwhelmed and start looking for "special servicers" to take over management of problem loans.
"Subprime servicers are good at servicing defaulted loans," Ms. Walsh noted. "If you see delinquencies rising on the prime side, you are going to have to see operationally how servicers are going to handle that."
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