DRI's surfing: more than the Web.

When Paul Wright first joined Newport Beach, California-based DRI Management Systems Inc., he flew down to Orange County from Seattle, where he was living at the time. The first thing he noticed as he walked through the company doors were a couple of damp surfboards propped against the wall. He quickly and accurately surmised that a group of DRI employees had been on the water before work. * While no one would accuse a technology company in the esoteric and very serious field of mortgage default management of having a surfing culture, the president and chief executive officer (CEO), Earl Olrich, is simply and only known as "Duke"--as in Duke Kahanamoku, the father of surfing. * Admittedly, Duke Olrich dismisses the link in the name, saying he thinks he got the nickname because his mother was a big fan of John Wayne. However, there is no denying the fact that Olrich, now 65, has been surfing for more than 50 years. You can still catch him down the shore at legendary surf beach San Onofre or, now that he's wealthier than he was as a teenager in the 1950s, surfing in Hawaii, Costa Rica or Nicaragua. * And it's not by happenstance that the new Web-enabled platform of The Default Solution[TM] that DRI will unveil in 2010 is called Rincon. It's the name of another legendary surfing spot--Rincon Point near Santa Barbara, California. * Although there are some good golfers at DRI, if you want to schmooze with its top executive the best place to do it isn't at the local country club. It's in the coastal waters of the Pacific. And it's cold out there, so a wetsuit is recommended.

Before Fred Melgaard joined DRI in June 2008 as executive vice president (also slipping into the role of chief operating officer), he was vice president of servicing products and customer experience for Lake Mary, Florida-based Harland Financial Solutions. "We had an association with DRI, and as part of that I had to touch base with Duke to make sure everything was on track," Melgaard recalls. "Occasionally, I had to come down to Newport Beach. On one of the visits, Duke asked me, 'Do you want to surf?'"

Well, what are you going to do when the CEO of a company you're partnering with wants to go surfing? Melgaard, who just as easily could become a ski bum as a techie, didn't flinch from the challenge. "I answered, 'You bet," he says.

Melgaard adds, "I lasted about three hours before I needed a break. With all that paddling, it's very demanding on your shoulders. But Duke--he's really good."

A pioneer in mortgage default management

Maybe it's a particular kind of California left-brain/right-brain kind of individual, but alongside the cool surfer persona, Olrich has also always been somewhat of a computer geek.

"I remember buying an IBM personal computer when they were about $4,000 and were one of the first personal computers in the market," says Olrich.

Somewhat similar circumstances got Olrich started surfing well before it became the thing to do. "It was before the Beach Boys," he recalls. "There were just a few people on the beach surfing. Then this movie called Gidget came out, and suddenly everyone wanted to surf."

Sometimes it pays to be among the first in a given field, such as being an expert in defaulted loans decades before the phrase hits the global subconscious.

Olrich started out as a home builder, but when interest rates shot up to 18 percent for permanent loans in the early 1980s, it was time to find something else to do. A friend on the board of a local savings-and-loan (S&L) asked Olrich for help. The friend's S&L was carrying 800 real estate-owned (REO) properties (properties that come back to the lender after foreclosure) on its books, but needed them rehabilitated so the thrift's portfolio could be sold.

The S&L business was a bit wacky back then. The REO department would work for 12 business days, then for eight days the department would shut everything down to accumulate reports. But Olrich, who by then had his first computer--that expensive IBM with slots for dual floppy disks--hired a programmer to create a reporting tool.

"Those eight days were reduced to three to four hours;' Olrich says proudly. "It was a raging success."

In 1985, Olrich, with a partner, formed a company called Diversified Resolutions Inc. and started selling default mortgage solutions to savings-and-loans in Southern California. "Ultimately, Freddie Mac got wind of what we were doing and we hooked up with the GSE [government-sponsored enterprise] in five different regions where we then had our systems installed," Olrich says.

The original Diversified Resolutions had two operations--software and consulting. "We would go into an S&L, install the software, consult and do all the training for default resolution," says Olrich. "But to have longevity in the software field, you need to have maintenance and upgrades."

In fact, each S&L wanted something extra. So Olrich started adding modules, including one for REO, foreclosure, claims management and bankruptcy.

By the late 1980s and early 1990s, a severe real estate recession hit the country (the last great real estate downturn before the current one), which probably should have been a good time for Diversified Resolutions, but the S&L industry collapsed and all but disappeared. In 1994, Olrich's partner wanted to go off and do consulting, so Olrich started a new company that was strictly software--DRI Management Systems. Its new clientele became mortgage companies.

In 1998, DRI Management completed its first Microsoft[R] Windows[R] version of the product as well as a Y2K version. And those small mortgage company customers? Many began to get swallowed up by much bigger financial entities, so in that way major New York-based banking companies such as Citigroup Inc. and JPMorgan Chase & Co. became clients.

Must be the right time, the right place

"When I first got here in October 2004, I looked at the statistics concerning the amount of debt held by individual households, how property values had risen astronomically in a very short period of time and how more people were getting loans without a lot of verification," recalls Wright, now senior vice president of sales and marketing.

"It occurred to me a perfect storm was brewing, and I started dialing for dollars--telling people I had the perfect product to prepare them for the future wave of default," he says.

Wright had hit the phones just a bit too soon. Home prices would continue to climb for another year, and Wright was looking more like, as he says, "Chicken Little claiming the sky was falling."

But in 2008, Wright notes with some satisfaction, "it's amazing how many of those people called me back--particularly in the last 12 months--and said, 'I wish I had bought DRI's system back then.'"

Indeed, the country has been hit by a tidal wave of single-family home foreclosures, and lenders and investors have been looking for a way to get a handle on the problem. A good place to start would be DRI, which offers a suite of integrated default-management software that can be used singularly or in tandem, and which can be interfaced with any other servicing or accounting system as well as outside vendors such as attorneys, valuation companies, property inspection firms and others.

DRI's flagship technology, The Default Solution, enables companies to minimize the cost of defaulted loans as well as manage and automate the servicing of defaulted loans--including prime and non-prime mortgage loans, and secured and unsecured loans.

As demand emerges for new expertise in this expanding sector of the mortgage business, DRI has responded quickly. In addition to its four early software modules--REO, foreclosure, bankruptcy and claims--over the years it has added loss mitigation, pre-foreclosure, litigation, property preservation, administration and auto/consumer loans.

The Default Solution also provides customizable Web portals providing interfaces for both foreclosure and bankruptcy with attorney firms, as well as for REO and broker interaction.

The default-management end of the market is not without competition. In fact, the dominant players are two companies with wider platforms that include default management: Jacksonville, Florida--based Lender Processing Services Inc. and its Mortgage Servicing Package (MSP), and Brookfield, Wisconsin--based Fiserv Inc. and its MortgageServ product. Olrich reckons that, combined, the two own about 70 percent of the default-management market.

The obvious difference between The Default Solution and the other platforms is that the former is a specialized product--and it does have its fans.

In 2008, Steven Horne opened a new firm called Wingspan Portfolio Advisors LLC, a Dallas-based specialty servicing enterprise that helps companies turn nonperforming loans into performing assets. Before that, he worked at Sherman Financial Group, a Charleston, South Carolina--based company that invests in distressed assets. Sherman Financial employs DRI software for, among other chores, its investments in second mortgages on primary residences.

"At Sherman, we chose DRI after reviewing all the systems that were available, because of its flexibility and configurability," says Horne. "We actually commissioned DRI to do very heavy customizations to handle the unique aspects of second mortgages."

The experience was so positive that when Horne started up Wingspan, he again turned to DRI. "I'm a big fan of Duke Olrich," says Horne. "It was a very easy decision for us to make."

DRI has taken its system a lot further than it was two years ago, when Horne was at Sherman Financial. "DRI has the ability to support our workflow; we move assets fairly quickly," Horne says.

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"We work with individual, assigned queues so the borrower always has one particular individual who is responsible for working with them. Then, as the loan rehabilitates, our workflow will automatically move it to 'performing' status and out of loan resolution," he says.

Wingspan uses DRI as its default-servicing tool and Harland Financial Solutions as the performing tool. "The two systems have been integrated for about 10 years," says Horne. "It has worked out well for us."

DRI gets a lot of Internet contacts from people starting call centers or loss-mitigation companies, Wright adds. "Some of them can afford DRI and some cannot. We have come up with a leasing program to accommodate the small startup shops. We are trying to give something back to the industry, trying to help as many people as we effectively can--not just with software, but from a pricing perspective."

In these times of marketplace turmoil, DRI can also be of importance to big lenders. Originations are down and workouts are up. "Banks don't really want to lay off 100 people in the origination department with all the energy and severance needed to do that, so they can then hire 100 people on the back end to do workouts," says Melgaard.

"With a system like DRI in place, if you have good people you can move them back and forth. That's a competitive advantage. The Default Solution can show you what options are available on a loan, answer a few questions and allow someone to come to a go or no-go decision on mitigation quickly," Melgaard adds.

The two big selling points for DRI are that it has a complete suite of products to handle every part of the default process from foreclosure to property preservation, plus it has been in the industry for more than two decades, according to Wright. "We have seen waves of default before. Obviously, this recession is larger and deeper than ever, but we have been successful in building this application to handle what needs to be done," he says.

Next generation

Early in 2008, DRI announced it would be introducing a fourth generation of The Default Solution, the biggest change being that it would be a Web-enabled application. Called Rincon, its aim is to minimize the cost of managing defaulted loans while tracking and servicing the loans.

"This is a [Microsoft] .NET[TM] solution using C# [pronounced C-sharp] technology," says Olrich. For non-techies, C# is a Web-based programming language from Microsoft that contains features similar to that of Sun Microsystems Inc.'s Java[TM].

Although DRI has made announcements about Rincon, it is not expected to be market-ready until 2010.

"From my perspective, when I see the future of our product, it is Rincon," says Wright. "Being a .NET C#-based environment, it opens up an opportunity for us to have an ASP [application service provider] model version and also could open up our market to small-and medium-tier lenders who want to have a platform and infrastructure to run their own default management," he says.

DRI is now being used by three of the country's top-five lenders, Wright adds, "and while we are trying to serve those large organizations, we also want to get the product into the hands of people that need it in a .NET environment."

According to the company, the Web-enabled platform of The Default Solution offers the following advantages over the original version:

* A browser-based application that leverages Web services to enable ease of deployment during implementation and system upgrades.

* A more robust workflow process supported by user-driven business rules.

* Letters, forms and spreadsheets embedded into the workflow model, providing a more automated environment for ordering, receiving and tracking.

* Web services that automate connection to third-party providers, including those offering inspection services, broker price opinions (BPOs), appraisals, credit reports, title reports, skip tracing, flood certifications and more.

* A solution that provides the opportunity to implement and maintain a true exceptions-based environment where users can rely on automation and manually review files only when a decision or review is required.

* An upgraded loss-mitigation decision model that includes client-defined scripts and economic models to help loss-mitigation analysts reach quick and consistent resolutions.

"While our largest customers acknowledge the benefits of Rincon, they have decided to wade through the height of the default storm with our current technology first and lay down the groundwork for the transition," says Wright. "In the meantime, the majority of our small to medium-sized customers as well as new prospects are looking forward to the benefits of Rincon and transitioning sooner rather than later."

One company with Rincon on its collective mind is Resurgent Capital Services LP, Greenville, South Carolina, the servicing and administration arm of Sherman Financial Group.

"I haven't seen the Rincon product in a long time, but I really liked what I saw," says Michael Keaton, senior vice president with Resurgent Capital Services.

"Absolutely, it will be something we will look at. One of the things that we think it will do for us is data synchronization between our DRI and Harland platforms. The Web-enabled piece doesn't make that big a deal to us, but it would for companies with many remote employees. For us, we have hardware in place that allows remote employees to be connected to our activities," Keaton says.

After thinking about the product some more, Keaton adds, "We absolutely will make the transfer. We won't be the first, but we will be an early adopter."

Resurgent Capital Services is probably best known as one of the nation's largest servicers of unsecured bankruptcies (the company's original business line). However, Resurgent also does specialty collections and recovery on behalf of Sherman Financial and other third-party clients. Resurgent employs DRI on its "secured recovery portfolio," where debt owed is secured by a car, house or even second mortgage.

"Why DRI?," Keaton asks rhetorically. "For that kind of stuff, it is more important to have a management-type platform than with the unsecured debt. With the DRI system, we get a couple of benefits. On the loss-mitigation side, we get the workout template. When you talk to the borrower about payment plans or partial payment plans, there are certain steps to the process and you are going to go through it on a timeline. DRI is a timeline-driven system."

DRI also offers modules that are important to Resurgent's foreclosure and secured bankruptcy operations. According to Keaton, what Resurgent likes is DRI's template-driven process for each of the 50 states, so the company can monitor its attorneys to make sure they are keeping things on track--especially in a bankruptcy process.

Resurgent has been using the DRI platform for the past six years. "There are definitely other systems that do what DRI does, but I've not looked at them in many years," says Keaton. "I didn't find them to be at the level of DRI in terms of being Windows-based, userfriendly, have the accessibility to pull data, offer good timelines, etc."

Keaton feels secure about his company's "partnership" with DRI. "What we like about them is that they seem to recognize that not every shop is the same. DRI has been great about customizing things for our specific approach [to] the business," he says.

Doubling down

Needless to say, during the housing boom there weren't a lot of companies clamoring for default-management systems, and although DRI had been around in one form or another for two decades, it remained a very small business for a long time.

In 1994, Olrich could count the number of employees on his fingers and still have two fingers uncounted. By the end of 2007, the company's total employee base was still at about 10 or 11 people.

It was in 2007 when DRI fortunes began to improve--which makes sense, because in the default-management world, your business success moves inversely to the real estate industry as a whole, and in 2007 it all began to fall apart in the housing sector.

The subprime market blew up in the summer of 2007, but Olrich says DRI started getting inquiries and business began picking up at the start of that year.

"It was early in 2007, just before it all hit the papers," he says. "Our feeling was, 'Boy, we got something happening.'" And of course something was happening. The subprime marked meltdown hit in August, and the country quickly slipped into a credit crisis and recession.

What all that meant for DRI was instant growth, which really came about in 2008. "We doubled our staff, doubled our office size, and by 2011 we will double our present staff," says Olrich. "We are already negotiating for more space."

One of the company's important hires last year was Melgaard, who joined the firm as executive vice president and also covers the role of chief operating officer. With growth comes the need for a change in organization, which Melgaard is trying to get a handle on.

"We were very soup-to-nuts with our staff, but having doubled in size after Jan. 1,2007, it's time for a separation of duties. Before, one person would do everything; now we have business analysts, developers, testers and professional service people to install product," he says.

Melgaard, as noted, came from Harland Financial Solutions, as did Wright. Also coming over from Harland was Josef de Beer, lead architect of DRI's .NET solution.

There are a number of reasons for this, including the fact that Harland and DRI worked closely together in the past and some of the former Harland employees naturally recommended their current working environment to old friends.

There is also a third factor. "If you are experienced in loss mitigation, foreclosure, bankruptcy, there are jobs everywhere. All the big banks are scooping up that talent," says Melgaard. "On the other hand, software people are being passed over--except here. We're viewed as being in kind of a glamorous area [in Newport Beach], so we have a little bit of a competitive advantage--which is good, because many companies are laying off their .NET engineers. We place an ad and we get plenty of responses."

Back in 1994, when the company had just eight employees, annual sales were in the $750,000 range. "In 2007, we increased sales by a factor of five, and in 2008 we doubled the previous year," says Olrich. "Our goal is to double sales again by 2012."

Melgaard is trying to make that happen relatively quickly.

"Our competitive advantage is our ability to deliver real solutions tailored to our customers' business models," Melgaard says. "Customers push work to us, but we need also to be out there pulling the work in. We need very intelligent, consultant-like people who can go on-site and say, 'We can do this for you. Have you considered these five things?' Our software has great potential, and few customers have taxed its ability."

He adds, "Many customers have not implemented some of our advanced features. It's one of our concerns, that a lot of our customers do not know the power that is available to them. We need to get out there and help them."

Steve Bergsman is a freelance writer based in Mesa. Arizona. He can be reached at [e-mail].

DRI Management Systmes Inc. is riding a wave of success brought on by decades of experience delivering default-management technology.