Consolidation v. Concentration: The Real Risk in Default Servicing


It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain

Legal and compliance officers representing mortgage servicers often cite concentration risk as a justification for maintaining an expansive network of legal service providers. It “just ain’t so.” Ironically, it is this focus on concentration risk that leads to slower case resolution and increased servicing costs overall.

Risk is inherent in all litigation. There are direct financial risks such as legal fees, court costs and other expenses incurred due to attorney action or inaction (e.g., sanctions, opposing party legal fees, refiling fees associated with lack of prosecution dismissals), along with indirect risks such as extended resolution timelines and reputational harm.

Mortgage servicers too often ignore the real risk of law firm failure. This risk, now a recurring reality in the default servicing world, is often overlooked in favor of spreading litigation across many law firms to reduce concentration risk.  As the volume of active default litigation shrinks, an expansive law firm matrix, albeit with lower concentration risk, only perpetuates an environment where many firms struggle to keep their doors open at the expense of effective case prosecution. To mitigate this increasing risk, servicers should proactively consolidate their networks and direct litigation to a more manageable and easily auditable number of meaningful retained law-firms possessing the financial strength and ability to zealously represent their servicing clients.

Servicers have more tools than ever to objectively monitor firm performance and assess real risk. Analysis of court data, for example, provides an auditable, verifiable source of information able to predict firm failure with great accuracy. To illustrate, Oversite Data Services completed a study in October 2014 utilizing court records to compare file movement among 11 law firms representing mortgage servicers in in New Jersey. One firm in particular showed little to no file movement over a three-month period, while other firms showed movement in excess of twenty percent. Less than a year later, the firm with little to no movement closed its doors.

Prior to the crisis, the default servicing industry operated with minimal firm oversight and unlimited trust. Now, there is extensive oversight and profound lack of trust.  The climate and marketplace is stabilizing and law firm performance can be objectively verified.  Finding a middle ground with the right combination of mutual trust and auditability would achieve the desired results while strengthening relationships between servicers and their preferred law firms. With this transparency, attorneys can operate their firms with confidence, knowing that with exemplary performance they will continue to receive new business, while servicers can refer files with confidence, knowing that the trusted firms in their network have capacity to execute successfully.

In addition to considering the actual risk of firm failure as paramount to the perceived risk of over-concentration, condensing one’s attorney network also accounts for the current economic state of mortgage default legal representation. Typically, most allowable legal fees for a foreclosure are paid at completion of the initial milestones, while the majority of costs are recognized later in the litigation process. Based on these factors, among others, new inflow is necessary to offset execution costs. The natural result of a portfolio dispersed among too many law firms with too few files is that the firms that do not receive an adequate number of referrals will fail to perform. Whether this failure is intentional or a byproduct of insufficient revenue, it will substantially diminish overall returns.

Chasing the perceived risk of concentration, by spreading cases across too many law firms, increases the realrisk of firm failures.  Servicers should mitigate risk by proactively consolidating their attorney networks and direct litigation to only a limited number of fully audited and economically viable law firms able to provide the level of representation mortgage servicers deserve.


Featured in HousingWire – October 16, 2015