Investors in distressed residential mortgages are getting hit with a double-whammy.

New servicing regulations are limiting investors' flexibility in handling distressed mortgages and properties. At the same time, a decline in inventory of such assets is spurring consolidation among special servicers, which further squeezes investors' profits because there's less competition for their business.

The confluence of trends is making efficient portfolio and vendor management vital, panelists said Thursday at SourceMedia's Distressed Residential Mortgage Summit in New York.

The increased regulatory scrutiny has also made mortgage servicing a much more consumer-complaint friendly environment, which will raise costs for servicers and their investor clients that have to respond to those complaints, said Chris Wittrig, a vice president at Land Home Financial Services.

"It's a litigious environment we live in and the more regulations that are created, the more weapons people have to file lawsuits," he said. "The [Consumer Financial Protection Bureau] has opened the door for new avenues for people to complain, and that cracks the door open for attorneys. So it's important to handle these loans as cleanly as you can."

Now-forbidden practices like dual-tracking of foreclosures and loan modifications, along with new requirements for making loss mitigation options available to borrowers, limit investors' ability to dictate to servicers how they want their portfolios managed.

"We have to follow the rules for how these things are managed…So there needs to be a general understanding of what the new rules are," said Rudy Orman, a senior vice president at Residential Credit Solutions.

New compliance requirements for managing borrower interactions during mortgage servicing rights transfers and portfolio sales require investors to honor pending loss mitigation offers made by the previous owner, even if it's not advantageous to the new owner.

"Occasionally, you're going to get stuck with something you don't like, but that's just the cost of doing business," said James Dooley, president of American Mortgage Investment Partners.

The growing compliance expenses come at the same time that distressed inventory is declining, making it harder for servicers to scale their operations and create efficiencies.

"There's going to be more consolidation on the specialty servicing side because the cost to service keeps going up," said Orman. "You're going to have to have a large parent in order to survive and be scalable."

Having the right systems in place to manage investor guidelines prevents surprises and helps to meet investors' expectations, which can vary widely across a servicer's set of clients. Technology platforms that offer a diversity of reporting capabilities and custom dashboards help servicers serve a broad variety of clients, and they help investors control the granularity of information they want on a portfolio.

"All clients look different. We have institutional investors that control downward and they basically push down all controls to us. With private investors and hedge funds, they know every last Social Security number and middle name in the portfolio," said Alan Sercy, executive vice president of the strategic recovery group at Vantium Capital.

Technology also plays an important role in proving compliance to regulators. When the CFPB examines a servicer, officials expect borrower-facing employees to be able to easily explain which loss mitigation options investors are offering to borrowers, said Wittrig. "When you're dealing with many small companies, it's important to have the technology that can do that."

Follow the Distressed Residential Mortgage Summit on Twitter: #buysellmortg14

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