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Do MSR Transfers Impact Mortgage Investors or Not?

OCT 2, 2013 5:25pm ET
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Ratings agency reports are reassuring investors that as a rule transfers of mortgage servicing rights from one servicer to another do not have a negative impact on mortgage-backed securities, but MSRs still make some insiders nervous.

"One thing that is going to change is the way MSRs are valued,” said Henry Santos, a managing director at Accenture Credit Services who has decades of mortgage market experience under his belt, which is why banks and investors are paying a lot of attention to ratings. “Also servicing anticipated for certain loans originated to certain borrowers with a certain risk profile, will be completely different.”

The servicing industry needs to build MSR values that are commensurable with the way mortgage loans have been created. “You cannot collect 25 basis points on a risky loan that has a high likelihood to default or be delinquent at least for a period of time.” Conduits with an appetite for secondary market investing also are monitoring servicing values, he said.

Large banks are keeping ratings agencies busy. Among others, Bank of America recently initiated several evaluation requests from Moody's Investors Service. Such ratings offer more transparency to all parties involved in a MSR transaction.

Nevertheless skeptics continue to question whether investors and other parties that have skin in the game should trust ratings agencies.

James Frischling, president and co-founder of NewOak, is one of those who think bank ratings should be taken with a grain of salt.

“The ratings agencies were accused of contributing to the financial crisis for issuing ratings that didn’t accurately reflect the risk associated with mortgage-backed securities and other structured products,” he said. “No wonder a recent report has accused S&P of winning business by offering more favorable ratings than its biggest competitors—Moody’s and Fitch.”

Regardless of such concerns banks continue to rely on ratings agencies.

According to analysts B of A requested Moody’s opinion on whether the ratings on the securities issued from the B of A loan portfolios that are part of the megabank’s MSR sale to Nationstar Mortgage LLC should be withdrawn.

Most recently B of A requested an evaluation of approximately 600 loans from Merrill Lynch Mortgage Investors Trust 2006-SL2.

The rating may give peace of mind to investors wary of previous downgrades to Nationstar’s portfolios that emerged in previous transfers during the downturn.

Moody's analyst Max Erick Sauray said that the transfer of servicing from B of A to Nationstar “will not, in and of itself and at this time, result in a withdrawal of the current ratings on the securities issued by this transaction.”

Nationstar will service and own the MSRs to these 600 loans by Oct. 31.

The ratings of each of the securities in the transaction, which are made excluding any applicable Certificate Insurance Policy, “will not have material negative implication” following changes in servicing strategy after the transfer, he wrote.

In September Moody’s gave similar ratings to MSR transfers for certain loans in 37 residential mortgage backed securities from B of A to Nationstar.

Servicing transfers to specialized loan servicing from One West and servicing transfers to Ocwen from One West also are not expected to have a negative rating impact on another 182 RMBS.

In the same report, however, Moody’s Ola Hannoun-Costa noted that no such opinion was provided on “other transactions” reviewed by analysts.

“Our ability to confirm in the form of a Rating Agency Condition, that a particular servicing transfer will not result in a withdrawal or downgrade of existing ratings on RMBS bonds,” largely depends on “the amount and timing of cash flows to the rated bonds,” she wrote.

Skeptics like Frischling, however, argue that the current system “in which the banks pay for the services of the ratings agencies creates potential for conflicts of interests” that could easily incentivize a ratings agency “to offer higher ratings in exchange for greater market share.”

It is important whether that still is the case five years after the start of the financial crisis, he argued. Freddie Mac and Fannie Mae efforts to launch a new risk-sharing structure product "in the hopes of attracting investors back to the private-label market" matter to Wall Street, the FHFA and investors with an appetite for residential mortgage credit risk, "but need a product that addresses the lessons learned from the bursting of the housing bubble.”

According to Frischling, many investors who after the crisis started to rely far less heavily on the agencies may be willing to consider obtaining a rating from the National Association of Insurance Commissioners.

Until then, the RMBS market can rely on continuous measures taken by ratings agencies to increase rating efficiency including Moody’s and Fitch.

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