Subservicing appears to be one sector of the mortgage industry where small, entrepreneurial firms not only survive, but thrive. Indeed, most independent subservicers did more business in 2008 than in 2007 and have expectations for even better performances in 2009.
"In 2008, we experienced a 44% growth rate," reports David Miner, executive vice president of Graystone Solutions Inc. a Sudbury, Mass. subservicer. "If we stay as busy as we were in January and February, this should be an excellent year."
Graystone, like many of the companies doing well in this sector, have carved out a particular niche. Founded in 1990, Graystone did traditional subservicing for mortgage bankers and community banks. But in the past few years, it repositioned itself to also do what it calls "shared servicing."
"We allow our clients to have Internet access to the Fiserv system, which is a real-time application, and as a result, they are able to share in the elements of the servicing process," explains Miner. "This is - by far - our most convenient and popular service option."
On a basic level, subservicing is a simple business. Owners of mortgages that would prefer not to create the infrastructure necessary to service loans outsource this work to other companies. These other firms remain in the background, keeping all the contacts in the client's name.
Cenlar FSB, a wholesale bank in Ewing, N.J. focuses its business activities almost exclusively on subservicing. The company, which has been doing this for over 40 years, is active in all 50 states. In 2009, the company serviced 375,000 loans.
There are two parts to Cenlar's business. The first - interim servicing, which, by definition, is short-term - has been decreasing as the market for mortgages has collapsed. In contrast, its core business of subservicing has "been stable, if not up a little bit," says David Miller, Cenlar's senior vice president.
Cenlar's subservicing has "behaved very well" over the last couple of years, mostly because the company avoided the subprime game, Miller says. "We have some subprime loans, because clients do that as a component of their business, but generally, we stayed out of that. We make our market with more stable participants, such as community banks and credit unions, that have weathered this market better than others. So, our business has been stable."
Miller remains optimistic about 2009. "We feel good about this year in terms of opportunities and the partners we will bring in."
Reverse mortgage subservicing
Another subservicer doing well that eluded the subprime wave is Celink, based in Lansing, Mich.
The company has been around since 1969, subservicing for the Michigan State Housing Development Authority and other state housing groups. However, in 2004, the company executives completely shifted gears and decided to specialize in what was then a very esoteric product: the reverse mortgage.
Although Celink still retains much of its original client base, it now calls itself the "reverse mortgage servicer."
Celink's move was a matter of survival. In mainstream subservicing, it would have had to compete against the likes of Cenlar. "When you are trying to sell against guys like that, it is difficult to get any traction," notes John LaRose, Celink's chief executive officer. "They are awfully good at what they do."
So LaRose began looking into reverse mortgages as a possible niche market. "I could see it had huge potential growth, even though it was - and still is - a small niche relative to Fannie Mae and Freddie Mac loan products," he says. "But it is a feel-good product; we feel good about what we do to take care of seniors."
To be honest, says LaRose, without making a market in this particular specialty, "we would be almost out of business. Now, we have 70 employees, and without [doing reverse mortgages], we would have been down to 10 to 12 and trying to figure out where the next niche was going to be.
"Our timing was fortuitous," he continues. "This is the only portion of the mortgage industry that is seeing growth. Recently, it was announced that there was a 15% to 20% increase year-to-year in reverse mortgages. I see growth ahead for a long time."
Actually, it is not the only part of the subservicing sector enjoying expansion instead of contraction. A number of subservicers have entered the distressed-loan side of the market, creating specialties of their own.
BSI Financial Services Inc. in Irving, Texas, was originally a mortgage subsidiary of First Bank Richmond in Richmond, Ind. but in 2006, an investor group, headed by Gagan Sharma, acquired the firm and transformed into a service provider in the fields of loss mitigation/default management, due diligence/quality control and, of course, loan subservicing.
"Besides our historical portfolio of performing loans, over the last two years, we have dramatically
grown our servicing portfolio of distressed, toxic, nonperforming loans," says Sharma, BSI Financial's president and CEO. "We do a significant amount of servicing of these kinds of assets. In 2008, we got a tremendous amount of business that relates to scratch-and-dent servicing. We expect 2009 to be a better year than 2008."
When BSI was acquired, it had 15 employees. Today, about 50 people work for the company.
BSI Financial expects to get a boost from investors looking to acquire portfolios of distressed loans. "We are working with several hedge funds that are acquiring these assets from banks and Wall Street," says Sharma. "This work is picking up dramatically."
Universal Network Servicing Inc. in Berlin, Conn. can be included in the group of independent subservicers picking up an increasing amount of distressed-loan business. The company was incorporated in 2003, but after initial success, it found its clientele withering away due to the credit crisis.
"I can say that 2007 was worse for us than 2006," recalls Michael Emmanuel, president of Universal Network.
Then the company started doing collections as part of its business, and Universal Network’s world turned around. "When we hit 2008, the collection piece started to take precedence, and business jumped off the books. 2009 will be even better," says Emmanuel. "In January, we sent out a half-dozen price proposals to companies that are interested in our services."
In the past, Universal Network's main clients had been mortgage brokers. Today, it's all about finance companies and limited liability corporations that have delinquent loans or that have been investing in distressed loans and need collections as part of subservicing.
"The last thing we want to do for our client is to go into the foreclosure process," Emmanuel explains. "We work with our customers to not only modify loans, but get the customers on some sort of plan, so they can move over time into a current status."
Today, subservicers are reporting increased inquiries due to new investors that are coming into the market and buying up distressed and defaulted mortgages.
"There has been an inordinate number of inquiries starting in the second half of 2008, when people were looking to take advantage of market opportunities," Cenlar's Miller notes. "Investors were looking to buy defaulted portfolios at discounted prices and then have subservicers service the loans."
Not every subservicer wants this business. Cenlar, for example, "has stayed out of that piece of the market," says Miller. "We thought the risks and costs would increase beyond where it made sense to us. We look instead to partner with good, strong, stable, long-term firms that are going to be in the business for many years."
Nevertheless, some of the larger independent subservicing companies are benefiting from the distressed-mortgage market - in particular, FCI Lender Services Inc. of Anaheim Hills, Calif.
FCI could be considered somewhat of a niche player as well. It works the private-money or hard-money sector, which is basically capital funded by private individuals and has nothing to do with Fannie, Freddie or major banks.
"FCI is the largest private-money servicer in the country," boasts Gordon Albrecht, FCI's executive vice president and chief operating officer. "We service $1.2 billion of active loans from investors and brokers who originate hard-money loans or buy current and delinquent loans."
The company has been around for almost 30 years and employs 50 people.
"I'm adding more than one broker a week," says Albrecht. "We went through the roof on the subservicing side. Hard money is always good business. It's a strong business that flies below the radar. Since we are the only national servicer, we have a good overview of this sector."
Albrecht states that in 2008, FCI "grew faster than [it ever has] before. There is no subprime, so everyone goes to brokers or private money to fund loans. And there are tons of investors out there who do not want to put their money in the stock market and are certainly not going to give to another Bear Stearns hedge fund."
Another reason FCI is experiencing a boost in business is due to investors' buying up delinquent loans. "Loans are being sold, because an institutional lender, who put the loans with an institutional servicer, could not collect. Now, the institutions are selling the loans for $0.40 on the dollar," says Albrecht.
When the economy is good, brokers are lending, and companies like FCI are subservicing these loans. When the economy is bad, the same companies handle the foreclosures, says Albrecht. "What's happening now is that both sides of the business are strong."
Steve Bergsman is a freelance writer based in Mesa, Ariz. and the author of "Passport to Exotic Real Estate: Buying U.S. and Foreign Property in Breathtaking, Beautiful and Faraway Lands," published by John Wiley & Sons.