Street Firm Offers Guide
With loan servicers facing a possibly unprecedented increase in delinquencies and defaults, Credit Suisse is trying to help servicers better understand what they can and cannot do to manage defaults and limit loss exposure.
Credit Suisse is developing a servicer guide, similar to those employed by Fannie Mae and Freddie Mac, to govern acceptable loan sale and servicing parameters. The guide, which may be a first among major Wall Street players in the mortgage securities market, is expected to be delivered later this year.
"As a lot of us know, 'acceptable servicing practices' is very heavily used in the private securities side," said Matthew Kobin, vice president, servicing oversight at Credit Suisse Securities. "We are trying to add meat to that understanding."
Speaking at the Western States Loan Servicing Conference here, Mr. Kobin said that Credit Suisse has a lot of changes going on in the area of servicer surveillance.
He said the seller/servicer guide will help bring transparency to participants in the company's private-label MBS program. One goal is to help servicers understand when they can approach borrowers about a possible loan workout and what workout options are acceptable.
He said the guide should "demystify acceptable servicing practices" at a time when servicers are facing many questions related to the handling of subprime, alt-A and adjustable-rate loans that face payment resets.
The data suggest that servicers will face a growing default management burden. So far, among subprime ARM loans that have faced upward payment resets, about 50%-55% refinance within three months of the reset. Another 8%-12% become at least 30 days delinquent, and the rest continue performing at the new payment level, according to data compiled by Credit Suisse and LoanPerformance.
Mr. Kobin said that in the last few months the share of loans sliding into the delinquency bucket seems to be increasing, though it's too early to tell if that is a trend or if it reflects seasonal variation. But with many lenders tightening underwriting of subprime loans, the refinancing options available to borrowers that face much higher payments after a reset may be diminishing.
Mr. Kobin said it is Credit Suisse's opinion that workouts should be considered on delinquent loans.
Credit Suisse wants its servicers to pursue workouts wherever possible. He said unless workouts are specifically prohibited in the pooling and servicing agreements, it is Credit Suisse's opinion that workouts can be performed on loans.
He said servicers should read "flexibility" into the PSA language as long as the interest of the REMIC and certificate holders are not adversely affected.
"We are pretty pro-modification when securitization covenants allow."
He acknowledged that servicers will face challenges in dealing with the mounting problems related to innovative subprime loans that grew popular in recent years.
"A lot of the products as designed are fine, but the way they were produced over the last few years did not meet design guidelines."
Some servicers have developed workflow automation that draws from the language in the PSAs to help determine when a workout makes sense, he said.
"One of the better practices we've observed among our servicing partners is the construction of work rules down to the securitization level, allowing staff to offer workouts that are in alignment with covenants," he said.
Mr. Kobin also advised lenders that with delinquencies rising, servicers will need to increase their capacity and strengthen vendor oversight. Servicers may also face a higher volume of "exceptions" than they are used to, he said.
"Vendors are going to be inundated with volume, heightening the need for solid surveillance," he said.
Other speakers on an investor panel at the conference, sponsored by the California Mortgage Bankers Association, echoed his comments about the need to prepare for rising delinquency challenges.
Leslie Bromer, servicing team leader at the Department of Housing and Urban Development, said the most severe problems are in the Midwest, with Rust Belt states like Ohio, Michigan and Indiana seeing rising defaults among FHA loans. But states like Colorado and Georgia are also seeing higher default rates.
"We are looking at some new loss mitigation options," Ms. Bromer said.
Beth Luth, a manager of servicer relations at Freddie Mac, said Freddie Mac stands behind its commitment to finance $20 billion of subprime loans, but she said Freddie Mac has tightened criteria to provide "a little more restraint" on the type of loans that get funded.
Those changes include greatly encouraging the use of escrow accounts to make sure insurance and tax bills get paid.
She said Freddie Mac still has yet to see a big impact from payment resets on its three-year and seven-year balloon loan products. The bulk of the three-year balloons will start facing rate resets next year, while the seven-year loans won't start facing resets in a big way until 2010. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/ http://www.sourcemedia.com/