Servicing Costs Rise.

DALLAS -- Servicing nontraditional products has become more of a challenge as potential default and foreclosure servicing costs keep going up.

"It is safe to say servicing costs are going up," said Ray Morris, vice president of sales and marketing, GMAC Mortgage, at the recent SourceMedia Mortgage Servicing Conference here. "That's a change within the past year."

The challenge for many shops he said is in finding the best ways to make the process profitable, such as higher process efficiency through outsourcing and a third-party site management.

Getting in touch with borrowers is another challenge, said Chip Hidinger, Fannie Mae acting director of nontraditional servicing. Many borrowers are taking the no-call approach "adding to the challenge" of servicers trying to come up with a resolution for a specific loan. It is hard to determine what is the best way to communicate with borrowers, he said. "In the end, what matters is trying to put them back into homes ... even if it's going to be at a 5% rate."

The unprecedented number of adjustable-rate mortgages, especially interest-only payment option ARMs, about to resettle, which represent anywhere from 20% to 30% of all loans, or one in five loans issued between 2005 and 2006, make the above issues even more important for all servicers.

When dealing with ARM resets, Mr. Hidinger noted, it is imperative to inquire whether after the reset the mortgage will still be affordable to the borrower and come up with loan modifications. Since about two-thirds of subprime loans do not limit the amount of modifications, he said, there are other options to explore.

Servicers, however, should be careful, said Scott Holzmeister, Wells Fargo Home Mortgage senior vice president of nonprime collections and loss mitigation. "Just don't do a blanket modification."