With a growing number of both mortgage originators and MBS issuers crumbling amid subprime market distress, loan servicers are seeing very little new volume come their way.

The lack of new issues has caused servicers to shift both manpower and business focus to loss mitigation strategies from traditional loan maintenance. This downsizing includes outsourcing responsibilities, according to participants at the Securities Industry and Financial Markets Association conference on MBS due diligence held in New York last week.

"There is no new loan volume to feed the beast," said panelist Shane Ross, senior vice president in account management at Litton Loan Servicing. Although the cost of servicing has increased 30%, Litton, instead of laying off staff, has been moving employees around. The company has deployed staff to areas in need of additional attention, such as loss mitigation.

There will also be consolidation within the servicing industry, Ross predicted. As an example, troubled mortgage lender HomeBanc Mortgage Corp. recently won permission from its bankruptcy judge to set up an auction to sell its servicing division.

In a similar development, Freddie Mac, along with a number of lenders, is trying to force bankrupt lender American Home Mortgage to give up its right to service loans for fear that these mortgages will decline in value if held by the bankrupt lender. American Home has resisted demands that it give up loan-servicing files in hopes of auctioning its complete loan-servicing business to raise money for creditors.

Panelists also predicted an increase in third-party servicer involvement. This comes with the need to expand default servicing, including an increase in due diligence and loss mitigation.

Servicers can use local vendors for foreclosure and REO-related activity, Ross said, noting that Litton currently manages 50% of its REO in-house and uses vendors to maintain the rest, which helps manage the volume of work coming in.

Panelist Damien Weldon, vice president in collateral and prepayment analytics at LoanPerformance, also noted increased servicing challenges as distressed asset levels continue to rise. $500 billion dollars in ARM balance will reset in 2007, Weldon said. He also pointed out that a rise in reported fraud is expected following the current wave of early payment defaults and repurchases.

In an effort to redirect focus and conserve costs, servicers can also outsource some of their back-office responsibilities, including tax coding and the scanning of insurance information, Litton's Ross said.

However, he also said that the servicer should not give up the critical function of monitoring the performance of the loan.

Not all servicers have had the proper management controls in place to monitor outsourcing and maintain a loan modification plan to weather the storm.

"We read the writing on the wall 12 to 18 months ago," Ross said. If servicers did not have a loan modification plan in place 12 months ago, they could face internal pressure, since it takes approximately one year to implement that type of strategy, he added.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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