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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 42 January 2024 E X P E R T I N S I G H T S D onna Schmidt is the Managing Director and Founder of DLS Servicing, a provider of loss mitigation support services, default servicing consulting, training, and technology for mortgage servicers. A seasoned professional with four decades of leadership experience in the mortgage industry, she is a sought-after authority on loss mitigation compliance. Donna is also the co-Founder of WaterfallCalc, an online loss mitigation decision and calculation tool that enables servicers to streamline loss mitigation calculations while ensuring investor and regulatory compliance. Q: How do servicers know the loss mitigation requirements for a given borrower when that borrower defaults? It's the servicer's responsibility to stay up to date with the guidelines and rules for each type of loan they manage in their portfolio. For handling borrower defaults, the requirements can vary widely de- pending on whether the loan is backed by the FHA, VA, USDA, or Fannie Mae and Freddie Mac, or was originated by a nona- gency lender. Ideally, servicers should have quality control processes and compliance checks in place to ensure that their loss mitigation strategy is in alignment with the relevant agency or investor requirements. Q: That seems like a lot of time involved; does that eat into profits? The time and resources required to stay updated on various loan types and their corresponding loss mitigation strate- gies can indeed eat into profits, but smaller servicers are impacted the most. Large national servicing institutions typically have the volume to divide these overhead costs. But even for them, keeping staff fully educated about frequent regulatory changes can be both time-consuming and financially draining. For smaller servicers, maintaining a staff that is well-versed on loss mitigation requirements for a wide range of loan types can be cost prohibitive. This not only impacts a servicer's bottom line, but it also shifts their focus away from other critical servicing functions like customer service and retention. Q: What are the risks for servicers? The risks are enormous. Agencies like HUD have very specific requirements out- lining the order in which loss mitigations options must be exhausted. One small mistake or misstep could void a guaranty or insurance claim, leading to a big charge against earnings and a significant loss of liquidity. For smaller servicers, the conse- quences of missing an agency requirement or not following the correct waterfall sequence are even more precarious, since they don't have the capital or liquidity to absorb the hit. Q: How are smaller servicers able to cope? Given the complexity and frequent changes in loss mitigation requirements and the risk of noncompliance, most smaller services need help. The savvier ones utilize third-party default servicing specialists that stay abreast of the latest agency rules and guidelines, constantly monitor local, state and national gov- ernment regulations, and are connected to nonagency investors. By tapping this expertise, smaller servicers can focus on their core competencies and maximize efficiency while minimizing their compli- ance risks. A capable third party will also have advanced software tools and internal pro- cedures that help servicers match infor- mation about individual borrowers with the appropriate loss mitigation options. Additionally, third parties with a broad client base gain a best practices advantage that just isn't possible for servicers working in their own silos. Essentially, they act as an extension of the servicer's business, providing the expertise and real-time loss mitigation assistance that most smaller organizations lack internally. Q: So, what is the solution to these complexities? Beyond getting professional assistance, the key to navigating these complexities lies in simplifying the process for bor- rowers. What we've found works best is meeting borrowers where they are already the most comfortable and engaged—their smartphones. Borrowers should be able to submit a simple loss mitigation applica- tion and any required documentation right from their smartphone or tablet. This increases engagement and response rates and speeds up time-sensitive loss mitiga- tion processes. For smaller servicers, leveraging tech- nology to facilitate mobile interactions can be a game-changer. It reduces the servicer's administrative burden, minimizes errors, Donna Schmidt, Managing Director and Founder of DLS Servicing, discusses the intricacies and difficulties in administering the loss mitigation waterfall. Maximizing Loss Mitigation Options