Being prepared can make all the difference between success and failure, especially in tumultuous times. At Velocity Servicing™, a LoanCare division, we take the phrase, “The best defense is a good offense,” to heart and believe that our role as your mortgage servicer is problem prevention. We achieve this with sophisticated, high-touch monitoring and reporting. If you are seeing warning signs in your mortgage loan portfolio, now is the time to act. We have the tools and experience to protect both the loan payments as well as your borrower relationships. Interested? Contact us or read on for more information.

Loan servicing can be a very beneficial way for lenders to generate a steady revenue stream while diversifying their offerings and building strong customer relationships. However, servicing is not without risk, and lenders must be prepared to manage troubled and distressed loans. The best way to mitigate the risk of managing distressed loans is to partner with a specialized servicing organization. Choosing the right specialized servicing partner is critical to the success of your portfolio, and we will break down the top five factors you should look at while making that choice.

But first, let’s discuss what a distressed loan is, and what kind of internal and external factors can affect the performance of a loan.

A distressed loan is a loan that is in danger of default, has already become delinquent, or is in default. The reasons why a loan may become distressed can either be internal (borrower-specific) or external. Examples of internal factors include a change in cash flow, loss of a job, or severe medical issues. Examples of external factors include economic downturns or cost increases, such as inflation.

Now that we understand what a distressed loan is and how it can become distressed, let’s dig into the top five factors to consider when selecting a specialized servicing partner to help you manage your distressed loan portfolio.

Factors to Consider when Choosing a Specialized Servicing Partner

#1 – A Well-Capitalized Partner

Before a mortgage lender or other mortgage company considers partnering with a mortgage servicing company, it is crucial to evaluate its financial stability and resources carefully. Having sufficient capital to weather any storm should be one of the most important factors to consider when choosing a mortgage servicing partner.

The risks of partnering with an undercapitalized company are:

  • Financial instability: If the company does not have sufficient capital, it may struggle to meet its financial obligations, such as paying bills and meeting payroll. This can lead to cash flow problems, impacting the quality and timeliness mortgage servicers should reliably provide.
  • Limited resources: An undercapitalized company may need more resources to invest in research and development, marketing, or other critical functions, resulting in a lack of innovation and competitiveness in the marketplace.
  • Difficulty in scaling: An undercapitalized company may need help scaling its operations as demand for its products or services increases. This can lead to delays in delivery times, poor customer service, and loss of market share to competitors. The health of your mortgage loan accounts and related monthly mortgage payments are the life blood of your business. Choosing a solid mortgage servicing partner protects both you and your customers.
  • Legal and regulatory risks: Undercapitalized companies may not have the financial resources to comply with legal and regulatory requirements, such as taxes, licensing fees, and insurance requirements. This can result in fines, legal disputes, and reputational damage.
  • Uncertainty about the company’s future: An undercapitalized company may be at greater risk of bankruptcy or failure, creating uncertainty for partners and stakeholders and disrupting ongoing projects and relationships.

Conversely, the benefits of working with a well-capitalized partner are:

  • Financial stability: A well-capitalized company is financially stable and has the resources to weather economic downturns and other unexpected challenges. This can provide a sense of security and stability to its partners, who can rely on the company to fulfill its obligations.
  • Increased resources: A well-capitalized company has more resources available to invest in research and development, marketing, and other business areas. This can lead to better products, services, and customer support, benefiting its partners.
  • Greater flexibility: A well-capitalized company can explore new markets, take risks, and invest in new technologies. This can create new opportunities for its partners to expand their business and enter new markets.
  • Credibility and reputation: A well-capitalized company has a strong financial standing and a good reputation in the market. Partnering with such a company can help to enhance the credibility and reputation of its partners as well.
  • Access to financing: A well-capitalized company may have access to additional funding sources, such as lines of credit or venture capital, which can help its partners secure funding for their projects.

When assessing the financial soundness of a specialized servicing partner, ensure you are reviewing the following areas:

  • Balance sheet strength, including liquidity and debt-to-equity ratios
  • Access to capital, including sources of funding and credit ratings
  • Financial track record, including revenue and profit growth, and a history of funding distressed loans

#2 – Modern Technology

Advances in technology have made it easier than ever for loan servicers to manage distressed loans. Technology has transformed the loan servicing process from automated reporting and predictive analytics to identify potential loan losses, to mobile access and user-friendly customer tools. Here are additional tools you should look for when selecting a distressed loan specialized servicing partner:

  • Automation: Loan servicing tasks such as payment processing, account updates, and customer communication can now be automated. This has reduced the need for manual intervention and has streamlined the loan servicing process. At the same time, these automation tools continue to safeguard mortgage payments and contribute to successful and sustainable homeownership.
  • Digital communication: With the advent of digital communication tools such as email, text messaging, and chatbots, loan servicers can now communicate with borrowers in real time, making it easier to resolve issues and answer questions.
  • Mobile apps: The availability of mobile apps has made it more convenient for borrowers to access their loan information, make payments, and communicate with their loan servicers on the go.
  • Data analytics: Loan servicers can now use data analytics tools to gain insights into borrower behavior and performance. This enables them to identify trends, predict delinquency, and offer targeted solutions to borrowers.

#3 – Real Time Scalability

We operate in a fast-paced world where things can change in the blink of an eye. Real-time scalability is critical to the success of loan servicing operations. It enables loan servicers to handle fluctuations in demand efficiently, improve the customer experience, and ensure compliance with regulatory requirements.

  • Managing fluctuations in demand: Loan servicing demand can be unpredictable, especially during periods of economic volatility. Real-time scalability allows loan servicers to quickly adjust their capacity to handle fluctuations in demand and ensure that borrower needs are met promptly.
  • Efficient resource allocation: Real-time scalability enables loan servicers to allocate resources efficiently by adding or reducing capacity as needed. This can help to reduce costs and optimize productivity.
  • Improved customer experience: Real-time scalability allows loan servicers to handle borrower requests promptly, reducing wait times and improving the customer experience. This can help to build customer loyalty and improve retention rates.
  • Faster issue resolution: Real-time scalability enables loan servicers to handle more borrower inquiries and resolve issues quickly. This can help to prevent small issues from turning into larger problems and ultimately reduce delinquency rates.
  • Enhanced compliance: Loan servicing is subject to strict regulatory requirements, and failure to comply can result in significant penalties. Real-time scalability allows loan servicers to quickly ramp up compliance efforts in response to changing regulations or new requirements.

#4 – A Dedicated Team for Distressed Loans

A dedicated team to manage distressed loans can lead to better outcomes for lenders and borrowers. Managing distressed loans requires a special skill set and an understanding of the delicate nature of the borrower’s situation, and having a dedicated team in place ensures these critical aspects are noticed.

  • Expertise: A dedicated team can bring specialized skills and experience to managing distressed loans. These skills may include loan restructuring, bankruptcy law, and other legal and financial knowledge essential to managing distressed loans effectively. We work with you as a partner and your homeowners, making use of loan modification tools and other techniques to keep your homeowners’ mortgages from foreclosure, short sale, or other negative outcomes. Our goal is always to protect your interests and, wherever possible, keep your homeowners in their homes and preserve their home’s equity.
  • Focus: A dedicated team can focus solely on managing distressed loans, allowing them to concentrate on developing strategies to maximize recoveries and minimize losses. This focus can result in more efficient and effective management of distressed loans.
  • Accountability: A dedicated team can be held accountable for managing distressed loans. This accountability can ensure that the team is committed to achieving the best possible outcome for the lender. This may not be the case if the responsibility for managing distressed loans is spread across different departments or individuals.
  • Timeliness: Distressed loans require prompt attention, and a dedicated team can ensure that necessary actions are taken quickly. This can help prevent further deterioration of the loan and reduce losses.
  • Communication: A dedicated team can communicate effectively with borrowers, creditors, and other stakeholders involved in managing distressed loans. Effective communication can help build trust and maintain relationships, which can be crucial in achieving successful outcomes for all parties involved.

#5 – Robust Risk Management

Working with distressed loans brings unique risks, so partnering with a specialized servicer with quality risk management tools in place is critical. Working with a distressed loan servicer who understands the importance of risk management can ensure potential risks are identified, assessed, and mitigated and that the process is conducted in a compliant, ethical, and professional manner.

  • Identify and assess risks: Risk management involves identifying and assessing potential risks that could arise while managing distressed loans. This includes understanding the underlying causes of the borrower’s financial difficulties, assessing the probability of default, and determining the potential losses that may result.
  • Develop risk mitigation strategies: Once risks have been identified and assessed, risk management involves developing strategies to mitigate or minimize those risks. This may include implementing loan restructuring or forbearance agreements, negotiating with borrowers or creditors, or pursuing legal action to recover losses.
  • Monitor and adjust risk management strategies: Risk management is an ongoing process that requires continuous monitoring and adjustment of risk mitigation strategies. As the borrower’s situation changes or market conditions shift, the risk management strategies must be reviewed and adjusted accordingly.
  • Ensure compliance with regulations: Working with a distressed loan servicer also requires compliance with regulatory requirements. Risk management helps ensure that all regulatory requirements are met and that the lender’s exposure to potential legal or regulatory penalties is minimized.
  • Protect the lender’s reputation: Managing distressed loans can be challenging and, if not done properly, can result in negative publicity and damage the lender’s Risk management can help ensure that the process is conducted in a professional and ethical manner which can protect the lender’s reputation and maintain stakeholder confidence.

Protect Your Portfolio

Velocity Servicing offers clients the ability to leverage the scale of LoanCare, its robust compliance and risk management infrastructure, and its operational capabilities, while also providing the talent and process rigor proven to address the unique challenges of specialty loan servicing. It has invested in and developed tools specific to this strategy and it utilizes a robust loss mitigation data model, Portfolio ARC™.

By providing the skillset and high-touch service necessary to move distressed loans into performing portfolios sooner, Velocity Servicing’s partners experience better resolution times with significant reductions in losses. So, if you and your staff have been losing sleep with worry about the health of your loan customers and their mortgage accounts, consider Velocity Servicing as your mortgage servicing partner. We are the mortgage servicing partner specifically focused on protecting your business which, in turn, allows you to get back to growing your business.

Contact Velocity Servicing, a LoanCare division, today to learn more!