'Counterparty Risk’ Hurting Servicing Sale Recovery?

Just when it appeared that the bulk market for mortgage servicing rights was showing signs of life again, something comes along to throw a monkey wrench into the works: counterparty risk. Investment bankers and advisors are pointing to recent efforts by Freddie Mac to make one of its servicers repurchase troubled loans because the firm in question owned the servicing “strip.”

Although loan repurchase requests are all the rage in the mortgage industry right now, investment bankers are concerned about the case — involving a privately held servicer in Texas — because Freddie Mac facilitated the sale of some of its receivables to the company.

In other words, the servicer was not the original seller of mortgages to Freddie but wound up with the servicing rights in a transaction approved and facilitated by the GSE. And then Freddie asked it to buy back troubled loans that it was servicing for the GSE. The company’s identity could not be confirmed, but several advisors are aware of the case and spoke about the matter as long as they not be identified. (Freddie Mac would not respond to e-mails and telephone calls about the matter.)

A trade group official close to the situation said because of the case the servicer in question has stopped doing deals with Freddie. “Right now, they’re saying they won’t buy anymore Freddie servicing rights.”

This official fears it could lead to a situation where “there is no bid for Freddie [bulk] servicing rights. And that means the value of Freddie servicing on their books is zero.”

He noted that there is some optimism. However, Freddie Mac officials are aware of the matter and are supposedly working on a resolution. He said a similar instance has not yet risen with Fannie Mae. “Fannie seems to more reasonable on these things,” he said.

Still, it appears that concerns over counterparty risk and servicing rights are affecting bidders’ appetites for bulk product. One East Coast-based servicing advisor said counterparty risk “has been an explicitly and commonly expressed issue with prospective servicing buyers for the past nine months or so.”

He noted that he had one “big” servicing client say it would not purchase any servicing unless the GSEs explicitly gave the company what he called a “get out jail free card” on the prior servicer’s representations and warranties.

Still, some large deals are getting done but mostly on portfolios that have to be sold because the seller is either out of business or desperately needs the cash.

Milestone Merchant Partners of Miami is now premarketing a $20 billion package of mortgage servicing rights that belonged to the now-defunct AmTrust Bank of Cleveland.

The $20 billion package of receivables is the property of the Federal Deposit Insurance Corp., which seized control of AmTrust in December. Most of its assets were sold to New York Community Bank — but not the thrift’s servicing portfolio.

Flagstar Bancorp, Troy, Mich., is offering a $10 billion package of receivables that are tied to Fannie Mae loans.

The thrift has declined to talk about the sale and neither will its investment banker, Interactive Mortgage Advisors of Denver.