The financial crisis has led to a rise in special servicing and European servicers are increasingly managing distressed portfolios for originators and investors

When the financial crisis began in 2008 the structured finance market suffered considerably as securitisation dried up. This coincided with an increase in mortgage arrears and non-performing portfolios that needed servicing, hence the rise of special servicing across Europe.

Standard & Poor's Ratings Services has produced a report, The European Servicing Sector Evolves And Adapts To Difficult Market Conditions, which looks at how the servicing sector has changed since the credit crunch.

The report notes that servicers’ client base has changed and now includes more investors and banks instead of special purpose entities (SPEs). Before the credit crisis servicers mainly managed securitised pools of credit on behalf of SPEs, which are legal entities used to finance securitisations.

The rise in the number of firms seeking to outsource to a third party administrator is due to a couple of reasons. Some smaller financial institutions do not have the infrastructure, technology and resources to deal with rising arrears and therefore look to outsource their collections activity.

Also, financial services companies are having to deal with tighter regulation and increased capital requirements so some have decided to sell part of their non-performing loan books (NPLs). Buyers of NPLs include insurance companies and hedge funds are they need someone to manage these portfolios for them.

Spain and Ireland

Outsourced special serving activity is expanding into countries such as Spain and Ireland where mortgage arrears have shot up in recent years. Traditionally banks in these countries have managed their own assets rather than outsourced.

S&P predicts even more expansion in Spain. New companies have set up such as the Spanish master servicer Finsolutia SA which opened its doors in 2009. But also the UK’s HML, Acenden and Link Financial Outsourcing have opened offices in Spain and Ireland. HML and Acenden specialise in mortgage servicing and Link Financial Outsourcing specialises in asset finance.

In March Oakwood Global Finance bought Vesta, a fully integrated Spanish loan servicing and asset management platform. Vesta manages 65,000 individual loan accounts with a combined value of €500 million ranging from residential mortgages to unsecured consumer loans.

Oakwood also has interests in Ireland. It was appointed as standby servicer in February on a portfolio of corporate and commercial loans with an outstanding balance of around €50 million for an international investment bank. It also won a master servicing contract of around €400 million of Irish consumer finance loans.

S&P says it has also received enquiries from servicers based in emerging markets such as Russia, Turkey and Morocco.

Diversification

Servicers are also diversifying into consumer finance, which includes personal loans, student loans, credit cards, leasing, trade receivables, insurance credits and utility bills.

Third party administrators are also increasingly offering more services to their clients such as advisory services, more reports on servicing activity and results, and even giving direct access to their database.

With the rise in arrears more servicers are using risk management tools to detect loans that are in danger of going into default. This can include systems modelling to create payment plans for borrowers based on income, expenditure and value of the property.

Come are even managing the sale of repossessed properties.

Ratings

Standard & Poor’s reviews 34 servicers across Europe and has assigned 70 public rankings. The UK leads the field in the number of ranking – 27 which includes 14 primary servicers and 13 special servicers.

Next is Italy with 22 rankings including four primary servicers, 14 special servicers and four master servicers. Germany has 17 servicers - 14 primary and 12 special. In Ireland there are three primary servicers and in Spain one master servicer.

There are more servicers than this as S&P does not rate all of them. Others are rated by the likes of Fitch Rating and Moody’s.

The UK’s third party residential mortgage servicers are Acenden, Crown Mortgage Management, Homeloan Management Ltd (HML), Target Servicing, Vertex Mortgage Services, Oakwood Global Finance and Exact.