Everyone in the mortgage banking industry is dealing with the effect of the foreclosure crisis which brought about unprecedented regulatory pressures and the need to reinvent the way mortgage servicers do business on a daily basis while planning for the long term.
Real and perceived mortgage servicer failure to assist borrowers, provide foreclosure prevention solutions and in the case of the larger mortgage servicers, failure to manage capacity challenges that crippled their ability to conduct workouts efficiently have already changed the marketplace.
For example, loss mitigation practices have become highly automated and thus more efficient, the high touch, face-to-face borrower communication and the single point of contact approach being required when managing loan delinquencies also have changed the servicing process.
Servicers’ strategies also have changed as they decide whether it is worth it to stay in the servicing space, outsource or exit it. Now more than ever the size of operations matters and often is a determining factor to the success of the business.
At the MBA’s National Mortgage Servicing Conference in Dallas, Mark Fogarty, editorial director of the mortgage group publications, Amilda Dymi, managing editor, Mortgage Servicing News, and Evan Nemeroff, Managing REO reporter, Mortgage Servicing News,
Fogarty began by observicng after many years of consolidating by the big servicers, now it’s the exact opposite—they’re deconsolidating. Bank of America is the most obvious example, but there are others as well. So how is that going to change things, with smaller and medium-level servicers coming in to take up some of that space, the bandwidth that the B of As and the Wells are dropping out of? Is it going to be a whole new world or is it just a slight change?
Vella: It’s going to be a whole new world. You’re seeing the banks replace their legacy delinquent portfolios with new originations as new volume comes in. And then with Basel III and all the other implications on your capital and your balance sheet of holding MSRs for the bigger banks, they’re using their money and investments otherwise, other places. So the MSRs are trading, and then you have the appetites of these midtier servicers who are very good at managing delinquent loans and could actually make money at it if managed correctly. So you’re seeing that transfer of assets to these midtier guys, and it makes sense for them. That’s their business model, that’s what they do, whereas the larger banks, they now want to change from a balance sheet perspective, clean that up and take the delinquent legacy portfolios—either liquidate them quickly or sell the MSRs, get them off their books, give them to the midtier guys. And the attraction to the mid-tier guys are, they specialize in that. They know how to monetize it. And the cost structure of managing delinquent loans and advances is a lot more expensive if you can’t perform and you can’t get the assets liquidated or into loan modifications quickly.
Morris: As I mentioned before, I think there is a shifting of it. And to a great degree the regulators and investors in the loans are comfortable now, because that really can’t happen. You can’t just slough off your issues without your regulator or your investors agreeing where it goes and how it’s managed.
Fay: When it comes to the end of the day, smaller servicers and midsized servicers are just better set up for this type of a situation. We didn’t have legacy issues. We started from scratch five years ago, so we started and created the entire company based on this. That’s what a lot of the smaller and midsized guys were created for. A lot of the guys that are now becoming bigger players…if you look at their history, they used to be called special servicers, just five or six years ago, so they’re better set up for this trade. If you go back—and using Countrywide as an example, if you go back and look at their 10-Qs or 10-Ks from five or six years ago, it talks about driving the cost of servicing down. They were completely sideswiped by this level of delinquency that nobody expected us to have. And obviously Bank of America is dealing with that now, as are some of the other banks.
Fogarty: It’s the Countrywide portfolio. So you’re saying that servicers who got in the business after the crash, they’re interested in performing servicing rather than default?
Fay: The ones of us who got in after, for example, my firm was set up for defaulted loans, so everything in the way we do things is specifically for defaulted loans. And loans in default, it used to mean nonperforming. Distressed used to mean nonperforming. Distressed now means nonperforming, ARM, subprime…loans that are upside down. Those are all distressed now, they’re hard to deal with. If a loan’s paid perfect for five years but it’s got a 150% LTV, that’s a loan people are worried about, and justifiably so, and that is causing problems for big organizations that were set up on a different model for servicing. And John mentioned it before about how things have changed. Again, these shops just weren’t set up for this, and it surprised everyone.
Fogarty: And will specialty servicers have to migrate as the bad books of business get worked through? Will they be migrating into a more conventional kind of servicing, do you think?
Fay: They already are. I think a lot of these guys are actually not that small anymore, so you really can’t call them a special servicer. They’re actually full-service servicers, because you would have Freddie and Fannie that want to take a lot of their delinquent loan portfolios and shift those to these midtier servicers. So you have to be good at the front end of servicing as well—the investor reporting, the customer service, the compliance, as well as just being able to manage delinquent loans—whereas a lot of the old-school special servicers, their primary piece of expertise was always, hey, I could mitigate my loans or I could sell them quickly in REO. Now you can’t just do business that way anymore. You have to have the full end-to-end suite of managing investor reporting and the compliance factor. So these servicers are now more well-rounded, as well as good at handling delinquent loans.
Fogarty: I was thinking about the mortgage insurance companies. Now there’s this huge divide between the ones that have survived that have the bad books of business and the new ones that have started up and have pristine books of business. It’s an enormous divide.
Fay: But it’s hard to come into this space now, or even in the last two years. If you’re a servicer and just want to come in and think that you’re going to be able to take on large portfolios or get a piece of—the investors are looking for established entities—people that have been around, have a track record, have data that can show that they can perform. So it’s a tough space to get in right now, it really is.
Fogarty: Most people are amazed at the strength and resiliency of the refinancing boom. I was reading about the HARP volumes just this morning. So is refinancing still a good way to get people out of poorly-performing loans going forward, or are we really at the end of that run?
Vella: I would say that the latest numbers are showing, what, about 15% decline this year, year-over-year, in originations, and at some point, with interest rates creeping up, at some point you’ll see that refinance volume come down. And I think from a delinquent loan, a lot of these portfolios have already been culled out, and there’s enough analytics in these portfolios where you can identify those potential candidates for refi, and a lot of that has been done over the last year. Not to say there’s not more coming, but I think it’s been cherry-picked, and I think interest rates can’t continue to be this low or go lower. So I see refinance volumes coming down, which will impact originations on a go-forward.
Morris: I think that to some degree we’ve culled through that. We’ve done that perhaps with a modification to some extent. As an industry and as a country, we may have to figure out different solutions, for example, solutions that have been around but not necessarily focused on like shared appreciation mortgages where that might be an opportunity, rent to own, and have that transition where someone can invest. Maybe the ownership of the property does go through a deed-in-lieu to the servicer with the opportunity to stay there, rent, and reestablish equity and reestablish credit. So I think, as John points out, we’ve culled over the norm, and we may have to look at different things to do.
Fogarty: My point was, though, that people have said that for each of the last three years, that the refi boom was over, and it hasn’t been. And now you don’t have things that are being driven by the market but they’re driven by the government, trying to get them into the HARP refis. So that’s what I was asking about: Will that disappear?
Dymi: A couple of days ago Barclays stated in report that while the rate of modifications is down, there are a lot of remodifications, they are saying these mods will kind of create a small refi wave, or at least people will try to move them into that space of the marketplace, because how else are they going to deal with it? And there are different reasons to remodify, obviously, but still that seems to be a fact, some mods default because payments were not reduced enough, so those delinquencies are not resolved yet.
Fogarty: Remodified as a result of a second default?
Vella: Even with the transfer of the portfolios, if I buy a portfolio right now from a larger bank, I may have more flexibility than a larger bank had. I could re-mod this guy five times, especially if it’s a whole loan. I could reduce principal. If I own the loan, it’s a whole loan, and I want to reduce principal by 40% and modify the guy, I stop my advances right away and I get a guy performing in a new loan mod. As portfolios transfer, you’re seeing new modification strategies on people that have been modified before for two reasons. If it’s in a securitization or was, you could stop the advances if it’s in a mod, or two, I may now have more flexibility, because if it’s a whole loan, I could cut the principal balance and I could still get away because I bought this loan so cheaply, so that’s why you’re seeing more mods being remodded. But those would not qualify for potential refis more than likely, so you wouldn’t see that coming from that pool.
Fay: There’s some legs in the refi piece of this, and the reason that it comes back to where the risk is and then it’s simple arithmetic. If I have risk already, would I rather own that risk at 5.5 or 3.5? I’d rather own the risk at 3.5, so I wouldn’t be surprised to see actually extensions of some of the programs. When I say risk, I’m not talking about the risk of the insurance on these different programs, not the bond holders. The bond holder likes the 5.5. But again, as long as there’s still a market for people buying 3.5s and you can get out of the risk on the front side of it, people are going to do so. I still think there’s some legs here. Again, John’s right. The low-hanging fruit is mostly gone, so the question is, will the originators get more aggressive, or will the terms get easier? I wouldn’t be surprised to see another round of one of those two things happening over the next year.
