Subprime Faces Cost Pressures.

Additional regulatory scrutiny and litigation risk inevitably may push up the cost of servicing subprime loans, some of the industry's leading experts said at the MBA National Mortgage Servicing Conference here (for related MBA coverage, see page 17).

And the added risk is causing subprime lenders to redouble quality assurance and customer service oversight.

"We just cannot afford to have our brand names or our parent companies dragged through the mud because of sloppy servicing," said Art Lyon, president and CEO of HomEq, a subsidiary of Wachovia. "There is just no way to cut corners on quality anymore and have a viable servicing entity."

John Vella, chief servicing officer at Option One Mortgage Corp., also

said that new risks in the market are putting upward pressure on servicing costs. He said servicers need to hire well-qualified people and monitor business partners closely.

"In today's environment, the risk associated with outsourcing is a lot higher," he said, noting that vendors are essentially an extension of the servicers own shop.

In addition, he said Option One is putting increased emphasis on training to ensure that servicing employees know how to manage the risks they encounter.