Black Knight Financial Services may have enough servicers using its Mortgage Servicing Package to give it a 55% market share, but the company still wants to win back the megaservicer that got away: Bank of America.
At an investor conference last month Brent Bickett, president of Black Knight's parent company Fidelity National Financial, mentioned Bank of America by name as a target client for MSP. He quite confidently predicted the Charlotte, N.C. lender would migrate its loans a roughly $782 billion portfolio to Black Knight's servicing system of record.
"We certainly know who doesn't use our platform and we actively market to that [group], the largest of which is Bank of America," Bickett said. "We have had good conversations So we think it is a matter of time for them to convert, because it makes all the economic sense in the world."
Large banks typically shun public acknowledgement of their vendor relationships, so Bickett's overt B of A name-drop was a bold gesture. Bold on the scale of the scene in the movie "Say Anything," where John Cusack stands outside his beloved's window holding a boom box and blaring a treacly Peter Gabriel song.
B of A, which declined an interview request citing its policy of not commenting on its discussions with vendors, used to service its mortgages with MSP. But after acquiring Countrywide in 2008, the bank moved its roughly 4 million loans to Countrywide's proprietary technology. Called the Loan Servicing, or LS, system, the platform was already managing a portfolio of about 10 million loans for what was at the time, the country's largest mortgage servicer. At the end of the first quarter of 2014, Bank of America's residential mortgage servicing portfolio had dwindled to about 6 million loans, ranked third behind Wells Fargo and JPMorgan Chase, according to MortgageStats.com.
Back then, the move off MSP made sense because Countrywide's technology infrastructure was considered to be among the strongest assets B of A got in the $4.1 billion, all-stock deal to acquire the troubled lender.
"The feeling among myself and other people at my level was Bank of America bought Countrywide for the loan portfolio, but they also bought it for the servicing platform because it was very inexpensive to run and it was very efficient," said Mike Rippy, a former Countrywide and Bank of America senior vice president who managed operations for the LS system and was part of the project team that migrated the B of A mortgages to the Countrywide system.
The move also reflected a prevalent industry viewpoint at the time that core servicing systems could be a point of competition among servicers. But times have changed.
"Prior to the current climate and heightened regulatory scrutiny that all servicers have faced, there was clearly a focus on leveraging the servicing platform for differentiation and customization," Joe Nackashi, Black Knight's chief information officer and president of its servicing and default technologies group, tells National Mortgage News. "In today's environment, servicers are looking for consistency in their servicing platform. In terms of core servicing, they're really not looking for differentiation."
Black Knight's predecessor, Lender Processing Services, disclosed B of A's move off MSP, along with the bank's decision to move its property valuations business onto Countrywide's appraisal network, during the vendor's third quarter 2008 earnings conference call. The call was LPS's first as a standalone company following its spinoff from Fidelity National Information Services, also a former FNF business.
The transition from MSP to Countrywide's system was completed in January 2010. Together, B of A's servicing system and appraisal business accounted for about $50 million of LPS's $1.86 billion in annual revenue in 2008.
Still, the combined B of A and Countrywide operation used other LPS services, and growth in that activity helped offset the lost MSP and appraisal revenue. It also helped that JPMorgan Chase moved its portfolio of prime mortgages onto MSP shortly after B of A converted off the platform.
The MSP platform's primary competition is homegrown systems of record. For example, the Countrywide LS system was originally built on IBM's Application System/400 midrange computer system. While AS/400 systems are a step down in computing power from mainframe-based systems like the architecture behind MSP, they're less expensive to operate. To keep the LS system running at peak performance, routine hardware upgrades were the norm at Countrywide.
"As the system grew and got to its capacity, we would upgrade constantly, especially during the 90s when the mortgage industry was going gangbusters," said Rippy. "We were upgrading every 18 months and IBM was keeping up with new models that were more powerful and had bigger capacity, so it was fairly easy to do because the application ported over to the new models seamlessly."
Vendors like FICS, Mortgage Builder and Harland Financial Solutions (recently acquired by DH Corp.) offer servicing systems, but those platforms are used predominately by smaller institutions. Fiserv also offers a servicing system capable of competing with Black Knight, but it lacks MSP's market penetration. Even when large institutions use a vendor-developed system, it's typically a highly customized configuration, such as Nationstar's implementation of ISGN's LSAMS platform and Citigroup's self-managed system that traces its roots to technology originally developed by Fiserv.
"[W]ith MSP, there is nobody that could face off with Bank of America. There is nobody that can do it, we're the only ones," said Bickett. "Either they do it themselves or they go to us."
Onboarding a new servicer to MSP can take anywhere from 90 days to 14 months, depending on the number of customizations a servicer requires during the initial implementation. Moving Bank of America back to MSP would in essence undo the massive Countrywide migration project.
"Every successful company periodically reevaluates technology and that's a smart thing to do because things change," said Rippy.
"So it doesn't surprise me that they may be looking at it. What I would be surprised at is if they do it," he added. "Think of the billions of dollars spent on the Countrywide purchase. Not that they would throw that away, but to change direction would be a radical shift. It would be the reverse project of what we did before, and that project cost millions of dollars."
Perhaps the strongest case that Black Knight can make to large servicers still using legacy systems — as well as the growing sector of nonbank servicers entering the market with custom-built platforms — is the recent technology upgrades that were needed to comply with the Consumer Financial Protection Bureau servicing standards that took effect in January.
To meet the deadline for the rules' effective date, a team of about 250 LPS employees worked to complete more than 100 updates to MSP and other servicing technologies. Nackashi estimates 75% of the development work was constant, regardless of the number of loans on the system, while the remaining efforts was client-specific. While servicers with proprietary systems were forced to shoulder the entire workload and expense of making upgrades to their own technology, Black Knight was able to lessen the burden by spreading the expense across its customer base, which also didn't pay extra for the enhancements beyond their base maintenance fees.
And even with the massive update for the CFPB servicing rules complete, servicers expect an ongoing pace of additional compliance changes.
"They're aware that the regulatory environment is not going to change or slow down," Nackashi said. "There's going to be continued investment in the servicing platforms, more towards regulation versus differentiation and investment in technology that will better automate processes."
That shift is what's giving Black Knight the confidence to think it has a legitimate shot at getting the B of A loan servicing business back. To do so, Black Knight may make the case that it's no longer desirable for a servicer to be out on an island, so to speak, with its core technology and processes. From the perspectives of regulatory scrutiny and headline risk, there's a sense of safety in numbers — that a servicer using the same core system that's used to manage the majority of outstanding U.S. first mortgages would be less likely to be singled out by regulators for deficiencies in its technology.
That might appeal to B of A, given recent issues it's faced with regulators and investors.
In April, Ginnie Mae halted the transfer of mortgage servicing rights from Bank of America to a nonbank servicer because the bank was missing documents such as recorded mortgages and title policies on the underlying home loans. The bank is also said to be in negotiations over a settlement with regulators to resolve claims related to the sale of faulty mortgage securities.
The growth of nonbank mortgage servicers is an opportunity for Black Knight to acquire new customers and another factor influencing the desire to get B of A back on MSP. For example, the nonbank servicer Ocwen Financial has ties to Altisource, a vendor that, like Black Knight's parent, Fidelity National Financial, offers services to the mortgage industry.
"Altisource has their own technology, so if Ocwen buys MSRs from one of our clients, we lose. That's a headwind for us," Bickett said at the investor event.
Nationstar uses LendingSpace, Black Knight's correspondent origination platform. And like B of A, Nationstar uses Black Knight's Desktop default servicing application, but doesn't use MSP — something else Bickett would like to change.
"Nationstar would be another nonfinancial player that has been buying MSRs that has an old technology system that we are frankly talking to, because we think it makes sense for them to convert over to MSP," he said.
While Black Knight risks losing loan volume when one of its servicers sells servicing rights to a servicer not using MSP, adding B of A's portfolio would alleviate that danger. Another thing Black Knight has going for it is that MSP has already developed the infrastructure to manage major investors like the government-sponsored enterprises and Ginnie Mae, as well as custom private-label investor types. Homegrown systems may only support Fannie Mae or Freddie Mac loans, which could impede certain servicing transfers. Black Knight also makes technology available to its clients to onboard bulk servicing transfers, while servicers with proprietary systems have to build new investor capabilities and transfer tools themselves.
Systems of record like MSP are essentially large accounting systems for tracking payments, investor reporting and other core functions. To handle loss mitigation and default activities, applications like Black Knight's Desktop connect with the system of record and serve as a workflow application for moving loans through the default servicing process. Desktop can connect to proprietary systems of record, but servicers can't take advantage of the real-time communication embedded in the integration between MSP and Desktop.
"In the case of a customer that is on MSP and Desktop, those interfaces are more of a real-time type interface between the workflow solution, Desktop, and MSP, versus more of an extract file or batch feed on a nightly basis," Nackashi said.
One reason B of A may decide to reverse course with its servicing system is a change in culture.
In its heyday under the leadership of founder and CEO Angelo Mozilo, Countrywide was willing to make investments in developing its own technology. But now, cost constraints outweigh the desire to build internal systems for many large institutions.
"Angelo Mozilo used to say Countrywide was a technology company that sold mortgages and we were quite proud of that," Rippy said. "Outside of the bad reputation that Countrywide now has, we were a tremendous technology company and we always built rather than bought because we always thought we could do it better than anybody else."
Coincidentally, the philosophy of running a mortgage company like a tech firm is an approach embraced today by Quicken Loans — which develops much of its own systems in-house, including a servicing workflow application that won the 2013 Mortgage Technology Servicing Trailblazer Award, but uses MSP for its core servicing system.
Soon after the conversion project was complete in 2010, Rippy and many of his former Countrywide colleagues were laid off. Other technology-focused jobs have been shed by the thousands as part of the "Project New BAC" cost-cutting measures initiated in 2011, along with other mortgage-related positions.
Bank of America's headcount reductions could be the strongest signal of its willingness to abandon the LS system in favor of MSP. When it's all said and done, cost will likely be the ultimate factor in Black Knight's ability to bring B of A back onto MSP.