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Why Loan Servicing Transfers Get Bungled

Ocwen Financial's agreement to sell $9.8 billion in mortgage-servicing rights to Nationstar shows that relatively sizable MSR transfers still occur —and that their risks must be addressed.

Regulators have been watching such transfers closely, showing particular concerns about continuity in terms of borrowers' workout options and complete document exchanges.

Doing this sounds simple, but it is easier said than done due to a lack of standardization that must be bridged through partnerships between counterparties, participants said during a panel discussion at the Mortgage Bankers Association servicing conference.

"We have to begin to trust each other," John Walters, vice president of default services at Freedom Mortgage, told attendees.

Even then, the process isn't easy, especially in large transactions.

"When so many loans get transferred, a lot of loans fall through the cracks," Faith Schwartz, a senior vice president at CoreLogic, said in an interview.

It is often a challenge for servicers to operationally handle large servicing transfers, said Karl Falk, chief executive of ShortSave, a provider of consumer-facing mortgage default servicing technology. "They couldn't afford to bring in people to manage all those files," he said in an interview.

At one point, it was relatively acceptable to transfer some trailing documents after the sale, but since Ginnie Mae nixed a servicing rights sale last year because of missing documentation, servicers have been trying to avoid such a practice.

"There are consistent messages about documentation missing," Ken Knudsen, head of consumer lending strategy in industry technology provider Fiserv's financial risk management solutions unit, said in an interview.

The Consumer Financial Protection Bureau, which has had concerns that transfers can interrupt borrower relief efforts, is watching servicers closely to make sure this does not occur.

The fact that some states require the original documents can add to challenges, said Richard Leibert, a lawyer at Hunt Leibert Jacobson.

Getting a timely assignment is also one of the biggest issues, said Jill Rein, a lawyer at Pierce & Associates.

Another challenge for transfers involves knowing about any state or local requirements for registering vacant properties or, in some cases, foreclosures, Walters said. "If you miss it, it will cost you," he said.

Registration also has a cost, Matt Varnum, vice president of real estate operations at RoundPoint Mortgage Servicing, said in an interview. "Registering the properties is not free," he said.

"Every regulation costs you," Varnum said, adding that he turns to a vendor that handles compliance in this area.

The closure of a law firm involved in an exchange of documents can also complicate matters, Liebert said. "If law firm A closes its doors, law firm B is going to be extremely challenged," he said. "Unfortunately, I think you're going to see more closing their doors."

Technology can help with servicing transfer challenges, but automation used to validate and transfer data and docs has traditionally been limited or piecemeal, though vendors are trying to address that, Knudsen said.

Differences between servicers' systems can also challenge transfers, Walters said.

Kathy Holmes, a senior vice president at Caliber Home Loans, said during the MBA's panel discussion that her company has a unit focused on addressing challenges tied to staffing servicing transfers.

"Do everything you can to assist the borrower," Holmes said.

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