MORTGAGE BANKING MAGAZINE

SERVICING COLUMN, MARCH 2007

Smaller Servicers Can Stay in the Game Despite Contracting Market

Counter-cyclical Benefits Derived from a Loan Servicing Operation

By James Dowell

As originations have slowed this last year and seem settled in for a continued reduction in 2007, mortgage companies have an excellent opportunity to start or expand a loan servicing operation.

Historically, this new or expanded venture was not financially feasible for smaller players and they were forced to drop out of the game when times got tight, allowing the big servicers to get bigger.

However, the advent of flexible technology, featuring database accessibility means a small company can enjoy the counter-cyclical benefits available during leaner origination times. The simplicity of LoanQuest Servicing’s rules-based decisioning technology means you no longer need large servicing contracts to succeed.

And, ironically, all those companies that have paid millions of dollars for mega-systems are now hard-pressed to handle the current tide of “non-traditional” mortgage products that comprise the majority of new loans today.

In the past, with shrinking margins and rising costs, small operators never stood a chance of making a profit. Servicing was “reserved” for the few goliaths who could afford to purchase one of the old legacy systems, where the break-even point is not realized until you reach half-a-million loans serviced. Today a company can get new browser-based technology for about 65% of what it would cost to buy one of these mega-systems and get in the game with one-tenth the number of loans.

Servicers who currently have small, 50,000-loan operations, struggling to make a profit, no longer have to sell off those portfolios.

With originations expected to drop 11 percent this year and another 7 percent in 2008 and with foreclosures up 19 percent, what better time to round out an originations business than with a servicing component that offers real-time computing? This ability provides vital insight into loan portfolios at a time when investors are more sensitive than ever to asset quality and performance.

Risk mitigation and fraud prevention are additional benefits derived from a nimble servicing system.

Recent statements from the Federal Bureau of Investigation indicate that mortgage fraud is becoming more organized and the Bureau is calling on the mortgage business for help, leveraging their expertise and industry knowledge.

Originators have long carried the burden of fraud detection and there are few platforms that allow easy data retrieval between origination and servicing systems. Aging servicing systems offer no ability to “know” your customers. LoanQuest Servicing retrieves borrower information directly from the LOS so there is no data loss during the loan’s transition.

Given the spread of fraudulent activities, a servicer is better positioned if they can retain private borrower information, rather than worrying about a third party’s potential unapproved disclosure.

Faster, better and more economical

Rising defaults and slow response times equate to higher costs and lower profits. An increase in defaults also means whoever can provide faster, better and more economical results will succeed – while others fail.

Because the transparency issue is so important today, we configure LoanQuest Servicing with automated interfaces to investor systems so they can watch loans more carefully and in real time. Tighter control and more visibility no longer is an option - it is a secondary market requirement.

.NET technology provides the flexibility to continue to adapt to the latest, “non-traditional” mortgage products. Systems designed for A-paper environments are not capable (or willing) to make the changes required by today’s evolving origination sector.

LoanQuest Servicing is feature-rich so servicers can customize it to meet their individual products and needs. The technology supports all levels of servicing and is appealing from a per-loan-pricing perspective due to shorter development times and lower hardware costs. Even greater savings can be realized if MortgageFlex hosts the system, no IT expenses equals additional savings.

The time is right to open the servicing world to all the players and let everyone in the game.

###

James Dowell is executive vice-president and chief operating officer of MortgageFlex Systems, Inc., a leading mortgage technology innovator, headquartered in Jacksonville, Fla. Dowell is responsible for operations management, customer relationship and employee management. He also oversees the development of the LoanQuest Servicing product. Additionally, Dowell serves as the MortgageFlex representative for several international organizations.