Subprime Servicers to Challenge Big Banks

At a time when megabank mortgage servicers are under siege by regulators and consumer groups for their treatment of customers, a small band of specialty servicers is trying to convince Washington that its members can do better.

The new Residential Special Servicer Coalition has set out to "raise awareness" among regulators and lawmakers about alternatives to big-bank servicers. The coalition's members will emphasize their expertise in restructuring soured loans and keeping borrowers out of foreclosure.

"A lot of people don't know what special servicing is," said Amy Brandt, the chairwoman of the coalition and chief executive of Vantium Capital Inc. Brandt is a former CEO of WMC Mortgage Corp., the Burbank, Calif., subprime lender that General Electric Co. shut in 2007 at the start of housing crisis. Her private-equity firm's holdings include the subprime loan servicer Acqura Loan Services, which, like Vantium, is in Irving, Texas.

Special servicers boast that they've succeeded in reworking a large portion of troubled loans by employing technology and assigning specific employees to handle each borrower. The coalition has 10 members, including Ocwen Financial Corp., American Home Mortgage Servicing Inc. and Saxon Mortgage Services Inc., a unit of Morgan Stanley.

There seems little doubt that the group's ultimate goal is to wrestle business away from the five biggest bank mortgage servicers: Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc. and Ally Financial Inc.

More than half of the megabanks' servicing portfolios are made up of loans backed by Fannie Mae and Freddie Mac. Only on rare occasions have the government-sponsored enterprises pulled servicing rights from large banks and given them to smaller players. That could change. Fannie and Freddie are looking at possibly shifting more servicing to smaller players, according to Ingrid Beckles, who runs the Washington advisory firm IBK LLC and was formerly a senior vice president at Freddie Mac. "Once a loan becomes 60 days delinquent it should be given to a specialty servicer," she said. Beckles claims management changes at the GSEs may have prevented them from transferring servicing rights. "You have to have a champion" to make changes in servicing contracts, she said.

Special servicers have been biding their time for at least two years while waiting for large banks to sell whole loans in bulk. Many built large-scale technology platforms to service large volumes of Fannie- and Freddie-backed loans. The expected servicing contracts never materialized, however.

Now, legal and other pressure could unleash the long-expected wave of business. B of A last month agreed to hand off to 10 smaller servicers a chunk of soured loans inherited from Countrywide Financial Corp. The agreement was part of a proposed legal settlement with bondholders.

Pressure to diversify servicing is also coming from industry experts, who have criticized regulators for allowing the business to become highly concentrated in the hands of a few huge banks.

"It's hard to look around and see who has the capacity" to service delinquent loans, Brandt said. "We want to educate regulators so they look at our industry and see the opportunity for us to work these defaulted assets."

The group aims to win business by using data to make the case that its special servicer members do a better job than big banks at keeping borrowers out of foreclosure. The group's members use similar loss mitigation efforts, which include loan modifications, repayment plans, short sales and deeds in lieu of foreclosure.

Bolstering the special servicers' cause is the fact that the 14 largest servicers have been operating under regulatory consent orders since April for servicing failures stemming from last year's robo-signing scandal.

A total of 4.2 million loans were 90 days or more delinquent or in the process of foreclosure at the end of June, according to the Jacksonville, Fla., data company Lender Processing Services Inc.