Online extra on challenges facing the servicing industry: Tough times for servicers
"Servicing is facing all sorts of challenges that previously it really did not have to deal with before"
Once loans are originated they are retained, sold or securitized, and all these loans then need to be serviced. Sometimes they are serviced by the originator or by another entity for a fee. The servicer is responsible for collecting and posting payments, paying taxes and insurance, managing escrows, reporting to investors, etc. A good servicer plays a key role in lowering default rates, increasing loss-mitigation opportunities, and shortening default timelines. But many servicers are financially challenged right now and although the 50 basis point per annum they receive for servicing a pool might be appropriate when there is house price appreciation it is not nearly enough for when things are heading south.
At the end of August, Moody’s downgraded several servicers, generally citing sub-prime as the cause. NovaStar Mortgage had its primary servicer rating for sub-prime cut to SQ4+ from SQ3+. Accredited Home Lenders, which was recently acquired by Lone Star – a private equity firm with a strong track record in NPLs – was also cut SQ4+ from SQ3+. Other companies affected incuded Specialized Loan Servicing and Fremont.
It costs servicers money to modify a loan.