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» Property Protocol Interestingly enough, experts at Ellie Mae maintain that some of the rules designed to ensure compliance these days may have the unintended consequence of undermining it. For example, they note that before new compensation rules took effect, loan officers had more skin in the game and were more incentivized to make sure the borrower received timely disclosures and that all the paperwork was in order. "Now that their compensation is predetermined by law," said Parvesh Sahi, Ellie Mae's VP of compliance solutions, "we are hearing that [loan officers] have less incentive to recheck their work, since they know they will be paid—regardless of what happens to the loan down the line." In addition, a lack of common data definitions across the industry will inevitably create challenges and yield hidden costs, Ellie Mae contends. According to the company's senior director and counsel of product compliance, Angela Cheek, "Lenders that have multiple regulators may find that these regulators are using different systems and may have different data definitions." Without question, regulators at all levels have inserted themselves into the mortgage servicing business, and each has their own ideas of how the industry should be operating. Newell said, "I don't know that government has been as involved in any industry and impacted an industry as much as housing. I'm sure there are others, but it certainly seems like there's tremendous involvement in what we do nowadays. In fact, there's not much we do that isn't impacted by the constantly changing regulatory environment." Newell points out that the government has always been one to step in when it believed an industry had strayed from the straight and narrow. "If you don't police yourself, then the government will come in and police it for you, and that is typically not the best scenario," he said. "If you don't operate your business in a manner that pays close attention to everyone's needs, not just profitability, then you'll find yourself being very heavily regulated by the government." Heavy regulation and oversight, it seems, is now a fixture of the housing finance industry's new world—it is a world of transformation and unique challenges but also a world of opportunities. POINT— COUNTERPOINT Asset managers and disposition specialists are dealing with a whole new breed of properties these days. "We're seeing a willingness to move REOs through auctions that normally wouldn't have gone that route," Sharga said. "Traditional REOs were of the scratch and dent variety. Now they are much higher quality and being moved much earlier in the disposition process." Sharga says this equates to a less severe loss profile for asset managers and opens the process up to far more interested buyers than the traditional methodology. "We believe that by moving these properties earlier, we have the ability to help the communities heal a little bit faster," Sharga also noted. "Particularly for government loans, there's a pre-conveyance period, which means once you go through the eviction, then there's trash out, the rehabilitation, and then you finally get around to marketing the property for sale. By moving properties earlier, buyers are much more motivated to get these homes rehabilitated and back on the market or at least occupied." For these investor buyers, the fundamentals are still the same, according to Eric Workman, VP of marketing for MACK Companies. Variables may take shape in the markets targeted, fluctuations in inventory levels, or rental price points, but Workman says it's a "simple formula" and that hasn't been affected by the whirlwind of changes enveloping the industry. The last few years have changed the types of players on the investment side, however, according to Workman. "With what happened—the crisis, all the tensions, and all the capital flowing—what we're seeing today is the creation of a new industry by way of large capital institutions," he said. Regulatory Discord MARKET PULSE "[We're] trying to figure out how we can be more efficient and stay completely compliant," Rawls said. "Ultimately, though, what you're going to see is servicers closing up shop or consolidating," with servicers going back to their roots—primary servicers focused on assets that are performing and handing defaulted loans off to specialized servicers. According to Carl McGehee, managing partner of the closing and evictions practice group at McCalla Raymer, the same is true for law firms and title agencies working on the distressed asset side of the business. "Most firms' evolution over the last few years is largely due to one's fear of extinction," McGehee said. For attorneys especially, industry sources say although the focus has shifted so heavily toward regulation and compliance, there has not been a proportionate acknowledgement of the costs associated with that transition. Attorneys point to litigation work as a glaring example— servicers are unwilling to pay anything close to market rate for litigation services related to mortgage default, they say. "Across the board, the changes we're seeing are really predicated on the challenges the industry wasn't prepared to handle," according to Rick Sharga, EVP at Auction.com. We're seeing growth of special servicers because they're better equipped to handle troubled loans, Sharga explained. We're seeing consolidation on the asset management side because fewer distressed properties are making their way to REO. "That's because REO really never reached the numbers people expected, partly because of alternative dispositions," Sharga said. Rothfuss likened it to "a little like reading the tea leaves," meaning it's anyone's guess as to what's going to happen in today's marketplace. "Everyone had this expectation that this big shadow inventory was coming, and [many firms] kept a high payroll with expectation something was going to happen that didn't," Rothfuss explained. "Firms are out there trying to figure out what the new environment is," Rothfuss continued. "What is the right size to be? Is it a business you should continue or look to diversify? But that's common for any industry that goes through an upheaval like we have." Regardless of the transformation that's taken place—whether it's the makeup of the stakeholders that survived or the length of the regulatory checklist that must be consulted— industry professionals have adapted. INDUSTRY INSIGHT Do the Numbers Add Up Now? Much of the imbalance stems from the fact that "case volume is down, but regulatory requirements and costs are way up," Rothfuss explained. "There are a lot of firms that weren't even in this business in 2000; they just kind of sprung up. And without the roots and pedigree, I don't know how they're surviving. Ultimately, it's going to lead to firms being run out of the business or a lot of mergers and consolidation." "There's a little bit of 'survival of the fittest,'" Rothfuss went on to say. "With the diminishing amount of cases, there can't be as many firms in this business. Servicers are told they can't have all their eggs in one basket, yet there are very high requirements for what type of firm they can use. I don't know how that gets reconciled." All of that, too, trickles down the chain. Servicers must make sure that regardless of size, the firms they use are in compliance; the firms have to verify their suppliers and service providers are in compliance, and it goes on and on. COVER STORY weren't required to do, such as SOCI-2 and other self-audits—activities that then "just made good business sense," he said. Wilde concurs that much of the additional investment needed for compliance is personnel-related. The added costs and strains innate in the industry's transformation are easier for larger organizations to absorb as they acclimate to the new environment. Many expect to see widespread industry consolidation in the years to come. VISIT US ONLINE @ DSNEWS.COM 85

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