Point of View: Unleashing the Power Of Servicing: By Kai Monahan and Binh HuaKai.

Mortgage servicing, like Thomas Jefferson - who famously counseled never to use two words when one will do - prizes efficiency. Indeed, even though financial markets are often more complex than an 18th century tract, the business of servicing loans still boils down to a few basics.

The value of servicing should not be overlooked by industry participants. Servicing is what allows mortgage providers to maximize cash flows to mortgage investors through strong connections and relations with the customers. Quality customer care, customer retention and cross-selling are all significant benefits of servicing.

The numbers prove servicing matters. The U.S. residential mortgage servicing business topped the $11 trillion mark in unpaid principal balance, or UPB, as of the third quarter of 2007. While thousands of servicers perform daily servicing operations for the residential mortgage market, the exposure based on outstanding UPB is still concentrated among a handful of top-tier players.

Despite the relevancy of servicing and the size of the market, challenges abound. One key risk is whether servicers will remain in business given the recent liquidity crisis. Should they fail, the transfer of servicing responsibilities from one lender to another is an arduous process.

Another concern is operational risk, such as the lack of adequate staffing to handle drastic increases in delinquency, default, loss mitigation, repurchase, real-estate owned assets and bankruptcy activity. Unprecedented levels of borrower delinquencies and defaults in high-risk assets, such as subprime loans, have exacerbated the current crisis and can wreak a heavy toll on any servicing organization.

And while servicing is indeed a revenue generator, it's also a volume game. This fact, along with the risks cited above, argues for making servicing a more efficient and responsive function.

Mortgage servicing faces an era of unprecedented increases in delinquencies, defaults, foreclosures, REO and bankruptcies. Though many servicing organizations may have excess capacity overall due to lower origination volumes, areas within each organization may be overwhelmed by the drastic increase in borrower delinquencies and defaults.