In an effort to cut the costs associated with foreclosure, Wells Fargo & Co., JPMorgan Chase & Co., and Bank of America Corp. have all in recent months brought in-house certain default management and loss-mitigation work.
The somewhat counterintuitive reason, according to a lawyer who advised all three lenders on the change and other sources familiar with the companies, is that technological advances have made doing the work themselves cheaper than outsourcing it. Related Link
The change also means some servicers will now deal directly with foreclosure attorneys, rather than using third-party companies to manage those relationships. Industry experts say this will cause a concentration of foreclosure work in the hands of fewer law firms. Such concentration worries Freddie Mac, which in recent months has met with several servicers to suggest that they diversify by choosing at least two law firms per state.
Spokesmen for Wells, JPM, and B of A all confirmed that they are bringing the work in-house but could not say why.
Michael Barrett, the lawyer who represents all three companies, said in an interview Wednesday that they have found "a cheaper and better way" to do loss-mitigation and foreclosure work.
"The entire industry is moving toward a direct sourcing model, or direct attorney assignments, which we just call the old way of doing business," said Mr. Barrett, chairman and CEO of the Barrett Burke Wilson Castle Daffin & Frappier LLP law firm in Addison, Tex.
Mr. Barrett — who sold a default outsourcing company he owned to the Santa Ana, Calif., title giant First American Corp. in 1999 — described the move by lenders "as simply a matter of technology" and said default outsourcers had been "simply moving paper from one place to another."
"Direct sourcing means sending the stuff that a lawyer needs to prosecute a [foreclosure or bankruptcy] case directly to the lawyer without sending it to someone in the middle," he said. "The process is quicker, safer, and much less expensive."
Dave Holt, an executive vice president and the chief operating officer at Fidelity National Default Solutions in Jacksonville, Fla., a unit of Fidelity National Information Services Inc., disputed the notion that the move toward in-house default management is widespread.
His company, which the title giant Fidelity National Financial Inc. spun off last year (they have the same chairman), manages 40% of active mortgage foreclosure and bankruptcy cases in the United States, Mr. Holt said, up from 1% five years ago. Bank of America is the only Fidelity client that has moved away from the outsourced model, he said.
"I don't believe servicers are running to this model," he said.
The primary benefit to a servicer of direct sourcing, Mr. Holt said, is that law firms will place employees on site to handle many administrative tasks once done by outsourcer title companies. These include accumulating all the documents to begin foreclosure or bankruptcy proceedings, updating software systems, and preparing bidding instructions. "This allows the servicers to reduce their cost of service," he said.
But he added that a direct sourcing model could create an oligopoly for some foreclosure law firms. When outsourcer title firms manage the attorney relationship, they typically use as many as 10 foreclosure law firms per state, and their performance is evaluated against a scorecard of completed foreclosures, he said.
The crucial issue is whether servicers will get the same quality of service if they reduce the number of law firms they use but lack the deep analytics that outsourcer companies use to track foreclosure performance, Mr. Holt said. "All of a sudden, you're tied into one or a few law firms where, if their performance is bad, or they aren't servicing the loans, how do you get rid of them, if you only have one provider?" he said.
That may sound like sour grapes, but Fidelity is not the only company voicing concentration concerns. Dean Cooper, an associate general counsel at Freddie Mac, said: "Some of the direct sourcing arrangements involve the servicer placing all their business with a single law firm, and we're a little concerned about diversification — whether it's prudent to put all their business with the same law firm. It's healthier in our view for there to be multiple foreclosure attorneys."
Al Will, the president of lender services at LandAmerica Financial Group Inc. in Glen Allen, Va., said, "Whenever some business explodes, as it has right now with lots of defaults and loss-mitigation activity, costs go up … and there are some folks changing the way they want to do business."
Though servicers will manage more of the default process in-house, largely because of technology, he said, demand for LandAmerica's BackInTheBlack default-servicing technology platform, which it bought last year from MSTD Inc., "far outstrips our ability to meet it."
"It's a lot cheaper to acquire and use the technology than to pay us on an ongoing basis," Mr. Will said.
Michael Barron, the general counsel for the default information services unit of First American, said: "Involving investors as well as servicers in our investigation of industry trends has led us to embark on a cost takeout strategy that has greatly reduced the cost of default outsourcing," largely by cutting the cost of default title products and other default services.
J.K. Huey, the senior vice president of home loan servicing at IndyMac Bancorp Inc., said the Pasadena, Calif., thrift company continues to use LandAmerica to oversee its foreclosure and bankruptcy inventory. But IndyMac has its own inbound and outbound call center in its loss-mitigation group. She called it a "hybrid" model.
"In some cases, outsourcing may be more expensive than doing the work internally," Ms. Huey said. "Servicers are focused on loss mitigation and making sure they're managing the risk, so they're evaluating their relationships to see if they're working."
