WE’RE HEARING…that some in the mortgage industry are finding recent legal developments are further complicating and even potentially changing business decisions involving sales of nonperforming loans from the private-label residential mortgage-backed securities market.
That is because the pressure for servicers to prove they are advocating for investors as well as themselves in business decisions involving nonagency securitization collateral could be bumped up another notch.
A case in point is an investor lawsuit filed against Nationstar, which recently resulted in a New York State Supreme Court order for the company to stop some nonperforming loan sales out of real estate mortgage investment conduits temporarily.
As a March 14 report on this by Credit Suisse researchers Chandrajit Bhattacharya, Marc Firestein and Gaurav Singhania put it, “NPL sales…are undoubtedly a positive event for the servicer, both for recouping advances as well as reducing costs.”
But KIRP LLC, a holder in six 2005-2006 RALI trusts originally issued by RFC, alleges that the note sales are not in investor interests in terms of generating the best return for them, and are not explicitly allowed for in the pooling and servicing agreements.
“Should the court allow these sales, any REMIC that does not bar these sales could very well see NPL sales used for loss mitigation,” the researchers said in the report. But a ruling also potentially “could set precedent for required hurdles an NPL sale must clear in order to be considered “in the best interest of noteholders.”
Now to a certain degree, interests are naturally aligned in the case of the latter and it makes sense. If you want to sell anything to anyone or keep them as a client, you should be somewhat considerate of their interests or you may never narrow the bid-ask spread enough to complete a deal, or get any repeat business. As the havoc the downturn wrought on the private label mortgage-backed securities market shows—if you burn clients or customers too badly, you lose them.
But it begs the question as to where the line should be drawn between the investor’s best interests/bottom line and the servicer’s best interests/bottom line/discretion in this situation.
The likely resolution to this, as the report suggests, is something that specifies what servicers would need to do to prove they are acting in the investor’s best interests. But it takes two to tango, so the servicers’ interest and financial considerations also should be a factor here, as well as in future PSAs.
Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.