Mortgage Servicing Future Remains Uncertain As seen in HousingWire May 2012

1. HOUSING WIRE / MAY 2012
Forecast: Hazy
MORTGAGE SERVICING FUTURE REMAINS UNCERTAIN
BY SCOTT GOLDSTEIN
The inability to forecast the twists and turns Scott Goldstein is President
and CFO of Farmington Hills,
in the foreclosure marketplace raises some Mich.-based NDeX, a leading
interesting questions about what comes next. provider of technology and
processing services for law
As even casual observers can confirm, the mortgage firms nationwide. NDeX has
offices in Michigan, Texas,
servicing industry has been through some turbulent Indiana, Minnesota, Florida,
times in the last few years. A potent combination of Nevada, California, Arizona
economic volatility, a shaky real estate market, indus- and Georgia. Goldstein
try scandals, and the resulting legislative and regulatory currently serves on the
reactions have taken foreclosure numbers on a roller Federal Reserve Bank of
Chicago Advisory Council.
coaster ride of ups and downs. It is in times like these He can be reached at
that industry forecasts and market predictions of expe- sgoldstein@ndexteam.com.
rienced analysts become more important than ever.
That is where we hit a snag, however. Because, RealtyTrac, one of the most respected resources in
unfortunately, those forecasts have–for the most part– the industry, had to revise their forecasts upward in
not panned out. Virtually every significant industry both 2008 and 2009, from initial projections of 1.9 mil-
forecast for the past two years has been wrong. Unfor- lion and 3 million filings, respectively. The final totals
tunately, that leaves servicing professionals with little to for those years were closer to 3.2 million filings in 2008
no reliable information to utilize in business planning. and 3.9 million filings in 2009.
All is not lost, however, because we can get order from More recently, the predictions have been more dire,
that predictive chaos. There is valuable information to but the results have been less dramatic. With a signifi-
be gained from that unpredictability, and important cant backlog of foreclosures at the end of 2009, some
conclusions to be drawn from that forecasting uncer- predictions for 2010 and beyond were as high as 4
tainty. What follows is a brief review of some prominent million foreclosures a year. In June of 2009, Housing
recent forecasts on housing prices and foreclosure Predictor forecasts that 10 million homeowners will be
rates, a discussion of some of the big questions–and foreclosed upon through 2012, and (barring a dramatic
possible answers–raised by those inaccuracies, and turn of events) that is a number we will almost certainly
some thoughts about what the current forecast consen- not come near.
sus might mean for the industry going forward. That same level of uncertainty and predictive
challenge is also evident in other areas. One of the most
THROWING DARTS? prominent legislative remedies to the foreclosure crisis,
Let’s start by taking a closer look at some of the widely the Home Affordable Modification Program, was wide-
disseminated real estate and foreclosure forecast trends. ly projected to help somewhere between 4 million and 5
In general, foreclosure numbers at the beginning of million homeowners. To date, however, there have only
the market downturn were somewhat underestimated, been around 910,000 permanent modifications.
while more recent projections have been consistently From the outside, it looks like we are not just throw-
overestimating those market trends. Some of the most ing darts, but throwing darts outdoors in the middle of
market savvy, knowledgeable and experienced observ- a strong earthquake with a powerful crosswind. This is
ers have been unable to get a handle on real estate and not a criticism of the accuracy of the data, the sophis-
foreclosure trends. No less an authority than Warren tication of the forecast models, or the experience and
Buffet recently acknowledged in his annual investor professionalism of industry professionals. These are
letter to Berkshire Hathaway shareholders that he has informed forecasts made by very smart people based
been “dead wrong” with respect to his housing market on quality data. It is simply the result of an extraordi-
forecasts. narily complex and evolving situation with a number of

2. interrelated and hard-to-account-for variables. It is a set continue to be central to any decisions that are made
of circumstances that can frustrate even the best minds going forward: what will the industry actually look like?
in the business. What will servicers be focusing on not just next year,
With HAMP impacting fewer homeowners, and but five or 10 years? The answers will dictate the hiring,
foreclosures unexpectedly trending down last year, training, growth and investment strategies for servicers
we would have expected to see delinquencies rising. around the country.
We have actually seen delinquencies continue to drop, Do you hire and train more employees to process
however. One possibility is that the economy is recov- more foreclosures; do you hire and train to process
ering enough to make a significant financial difference HAMP packages and trial modifications; or do you
in the outcomes of struggling homeowners. But with hire and train with an eye toward satisfying new
unemployment still at a high level and economic indi- regulatory obligations? How much technology do you
cators still lagging, that does not make sense, either. invest in, and to what end? Do you need to worry about
overinvesting and discovering in a few years that the
SHADOW INVENTORY HEAD-SCRATCHER legislative or regulatory landscape has fundamentally
We also keep hearing about a “shadow inventory” changed and you have wasted your resources?
of foreclosures, a factor contributing to many of the There are no perfect answers. And in the absence
aggressive 2011-2012 forecasts. But as delinquencies of certainty, forward-thinking servicing professionals
continue to improve and volumes remain stagnant, the would be wise to position themselves in a way that max-
shadow inventory looks like another missed predic- imizes flexibility and adaptive potential. While recent
tion head-scratcher. There must be a “leak” (or leaks) indications are that the economy seems to be picking
in the figurative bucket that makes it hard to pin down up steam in a more sustainable and significant way, the
an accurate forecast and plan and execute accordingly. short- and medium- range forecasts for the mortgage
It brings to mind the old quote about the only certainty servicing industry remain a low-confidence bet. Will
being uncertainty, which presents a strategic challenge the foreclosure spigot get turned on? Or will it perhaps
within the industry for servicing professionals looking slow to a trickle? Until we can answer that question
to plan, prepare and adapt for what comes next. with confidence, it is incredibly hard to forecast what
One reason that these forecasts are important is to a staff should look like, what revenue should be, what
ascertain what recent uncertainties tell us about what is resources should be available, and what plans for the
happening in the industry and–more importantly–how short-, medium- and long-term should look like.
to adapt and evolve accordingly. How is it possible for What the best servicing professionals are doing,
servicing professionals to plan for the future when they however, is not so much looking forward as looking
are trying to process and analyze these seemingly con- back to basics. It may seem obvious, but it is far too easy
tradictory forecasts and results? It feels like the industry to get caught up in the confusing jumble of predictions
is playing catch-up: skating to the puck without really and lose sight of the fundamentals—solid people, pro-
knowing where it is headed. cesses and procedures. In the context of a historically
volatile foreclosure market, focusing on doing things
PLANNING FOR THE FUTURE the right way today is the best way to prepare for an
The questions raised by this dynamic are significant, uncertain tomorrow.
and do not lend themselves to clear or easy answers. At That means service the clients, process valid foreclo-
a time when the best forecast would almost seem to be sures when appropriate and work out loss-mitigation
the opposite of the prognosticative consensus, is stay- solutions where you can. It means be responsible and
ing the course the best alternative? Is having no plan respectful, perform good legal work and identify and
perhaps the best plan in order to allow for maximum quantify important metrics.
agility and adaptability? To complicate matters, there In times of uncertainty, it’s best not to overinvest or
is the new issue of additional expenses and logistical let a prediction drive your strategy, or fall prey to inertia
complexities associated with the Office of the Comp- or plan too far ahead.
troller of the Currency’s Consent order and regulatory Servicing professionals who can continue to invest
requirements resulting from the national attorneys in good people and good technology while maximizing
general settlement. efficiency and remaining flexible, agile and customer-
Fundamentally, the biggest questions confronting service focused will find themselves better equipped to
servicers fall into three broad operational categories– effectively and efficiently respond in an evolving mar-
personnel, technology and facilities. It includes criti- ketplace. That is one of the few predictions these days
cally important structural question that is now and will that can be confidently relied upon. n