For many years IBM has eyed the mortgage industry curiously, a technology giant trying to find an angle on how it can make money from residential finance. After all, with 62 million outstanding loans in the United States, there must be a way for IBM to profit.
Two decades back “Big Blue” was even toying with the idea of buying a mortgage origination and servicing franchise but ultimately passed on it.
But now with the industry on the threshold of a major restructuring and questions being raised about the instability of mortgage servicing rights (thanks to the Basel III accords’ capital rules), IBM is now making a major run at the mortgage business as a specialty servicer and a monthly processor of loans.
According to officials who have spoken to the company, not only does it want to be a player, it has designs on growing its nascent servicing platform to $500 billion in scale.
The $1 trillion figure also has been thrown around by some at IBM.
Its strategy thus far has been to approach Fannie Mae directly and pitch its services as a processor of high-touch loans, among other things.
The GSE, a ward of the government, hasn’t been happy with how some of its seller/servicers have been handling delinquent loans, even yanking away servicing rights from such firms as Flagstar Bancorp and others.
Those resulting mortgage servicing rights have wound up at IBM’s servicing platform, which is called IBM Lender Business Process Services.
Based in Beaverton, Ore., LBPS, as it is known, includes the old Wilshire Credit Corp. unit that IBM bought a little more than a year ago from Bank of America.
(Bank of America inherited the company when it bought Merrill Lynch, which already owned two legacy subprime assets in the form of First Franklin Financial Corp. and Home Loan Services.)
When IBM bought Wilshire (supposedly at a premium) it expected that B of A would leave some of its servicing on the platform, but instead the bank yanked it away for reasons that still aren’t clear, said officials close to the matter.
Somewhere along the line IBM sold Fannie on the idea of using LBPS as its premier specialty servicer, convincing the GSE that it would need to have a major hands-on approach given the fact that 10% of the nation’s $9.8 trillion in mortgage debt is in some stage of arrears.
Fannie bought into the idea and LBPS was launched.
Recently, IBM began renovating office space in the Raleigh, N.C., area to ramp up the anticipated boatload of MSRs it hopes to take on. (It hopes to maintain the Oregon servicing site as well.)
But with IBM and LBPS declining to discuss any of its plans, there is little in the way of solid information offering much detail on how many MSRs the company has amassed to date.
Consultants and advisors that work in the servicing sector claim JPMorgan Chase recently shifted over $47 billion in servicing rights to LBPS with a stated goal of moving over another $53 billion or so.
A JPM spokesman declined to comment, but a source at Chase confirmed that a “large transfer” took place back in the early fall.
One point of confusion regarding the story is whether IBM/LBPS is actually the owner of the underlying servicing rights or acting as a subservicer.
Investment bankers told this publication that in some cases LBPS is in fact the owner of some of the MSRs it is processing (and that Fannie Mae, somehow, subsidized the transactions).
If IBM does own servicing rights, that would put it at risk financially unless it bought the assets at a discount, which it very well could have.
Then again, it’s always possible that IBM is playing the mortgage game with very cheap money: back in August the technology gorilla raised $1.5 billion in cash by selling three-year bonds.
The yield on the debt is a meager 1%, one of the lowest bond offerings in corporate history.
