Changes Urged To Serving Model
SAN FRANCISCO-The fixed compensation model for servicing loans is "broken" in today's economic landscape, because it requires delinquencies to be stable in the 5% to 10% range.
That was the message from Steve Horne, president and CEO of Carrollton, Texas-based Wingspan Portfolio Advisors, who added credit unions are a "good fit" for being "special servicers."
According to Horne, being a "special servicer" means a combination of high-touch and high-tech to take over nonperforming or low-value loans. Special servicers would be a sub-servicer to the loan holder and would be paid on performance, he explained.
"Credit unions have the technology and the infrastructure, and more importantly, the inherent respect for borrowers," he told attendees of the NAFCU Annual Conference here.
Working out problem loans requires a true understanding of personal situations and an absence of a "bill collector" approach, he said. Most consumers who have fallen behind on their loans due to job loss, medical expenses or other circumstances out of their control (as opposed to those purposefully defaulting), are "scared and ashamed," he explained.
"Building member trust and confidence in the outcome is half the battle," he said. "When cast a lifeline, 90% of people will take it to preserve their family home. This reinforces the social contract that has been lost lately." Each foreclosure reduces the value of surrounding properties by 6%, he noted.
The typical CU loan portfolio is "better" than those held by most banks because there are "no crazy loans," Horne said, adding credit unions are still dealing with more defaults than they experienced in the past. "What were fairly pristine books are not as pristine as before," he said.
Special servicing is not for every CU, Horne continued. Managing defaults while maintaining close relationships with members is not easy, especially in cases where families are in danger of losing their homes and stress levels are high.
These instances call for specific skills backed up by training and scripting. Asset valuations can be tricky without experience, he noted.
The good news: members get to keep their homes in most cases, and asset value is restored. Horne said 80% of the loan modifications Wingspan offers close, and 80% of those mods are still performing a year later.
"Special servicing is the best strategy when the institution is respectful toward and patient with the borrower," he said. "Borrowers are very receptive to people who take the time to listen to them.
"Credit unions are well positioned to get into the special servicing industry," he added.