By Izzy Leizerowitz, 2007
In the best of times, servicers have been literally cash machines for their owners. Wells Fargo and Countrywide, arguably the largest two national servicers, now report almost $1 billion in quarterly servicing revenue each. The ability to generate significant transaction fee income and float balance income, coupled with an unprecedented rising refinance market, allowed servicers to grow their operational platforms literally being pieced together regardless of economic form or function. Well, we know times have changed. Origination volumes have been reduced significantly, and servicers are now looking to restructure and review every part of their operations to maintain their recently achieved margins and profitability. As a result, we can expect to see servicers consolidate and perhaps even close operations as margins dwindle. Servicers historically have always tried to maximize profits by maintaining efficiencies in areas such customer service, fee collection and management, payment default prevention, and managing prepayment projections.
Today, servicers are looking into additional, innovative modes of maximizing efficiencies and profits including installing new technology platforms, incorporating shared or third party servicing arrangements, and even implementing cross selling platforms in some cases. We expect the servicing industry will be hit in 2007 with an interesting array of challenges that will test the economic strength and vitality of many servicing enterprises including, the advent of resets of many Adjustable Rate Mortgages, increasing loan delinquencies and foreclosures, rising loan defaults due to fraud, and implementation of regulatory changes regarding additional disclosure requirements both investor and borrower related. How servicers hold up in the face of these challenges and in the current reduced origination market, will be based on how prepared they are and how efficient their operations will be performing. To an extent, the good servicing enterprises will be looking to incorporate fraud detection mechanisms, reviewing loan default management tools, implementing compliance testing mechanisms, and maximizing their customer service platforms.