Here's how I opened the SourceMedia annual Mortgage Servicing Conference, held recently in Dallas. Let me knowwhat you think of my remarks! Enter your comments below and hit submit.
Servicing has always had the reputation of being a countercyclical play in the mortgage business. When originationsdry up, usually as the result of an increase in interest rates that makes loans more expensive and less attractive,servicing runoff dries up as well, making the asset more stable and even more valuable.
What we have seen in the past year is somewhat unusual, as originations have taken a terrible beating but ratesremain on the low side. There was even a mini-refinancing spurt a couple of months ago when rates on the 30-yearfixed-rate mortgage dropped to around 5.25%. But rates have inched back up since then and the best guess is thatthey will continue to do so in today's stagflationary economy.
We've recently reported fourth-quarter and full-year origination numbers as compiled by our affiliate, the QuarterlyData Report. Total volumes were at a seven-year
| The subprime mortgage niche has vanished. |
low, dropping below a $2 trillion run rate. The subprime mortgage niche has vanished. Let me repeat that. The subprimemortgage origination business is gone. In 2005, there was a total of $665 billion in subprime originations. Inthe fourth quarter of 2007, there was $6 billion, all of it in agency business. Alt-A lending has been similarlydevastated. For the fourth quarter of last year it was down 87%. And jumbos were down by half.But what about servicing? In this week's National Mortgage News we reported that the top 20 residentialservicers increased their holding by 13%, to $7.7 trillion. And their market share increased by 4%, to nearly 84%of the business. There is no doubt that the servicing niche, along with government and agency lending, is the areaof the mortgage business that has best held out against the rolling disaster that has been unfolding since lastsummer.
Consolidation of the servicing area is a trend likely to continue. If the proposed merger of Bank of America andCountrywide Financial goes forward, the merged institution will have a 20% market share all by itself. And as otherlenders fold, their portfolios still need to be serviced, providing potential gain to servicers equipped to acquirethem at low cost.
That doesn't mean the outlook is totally rosy. Somebody has to service all the nonprime mortgages made in the lastcouple of years, and these are not performing well, to say the least. Workouts, loss mit, foreclosure expertise,and real estate owned are all growth areas at the moment. The ability to cut losses on these portfolios by thebest and most precise execution is absolutely key to any servicing operation today.
But there are areas of growth that smart servicers will be looking to gain or regain expertise in. Many will berelearning how to service FHA loans again, as that venerable agency gains market share, especially in refinancingstressed nonprime borrowers. And what about servicing the reverse mortgage, a loan that's bound to grow in interestas baby boomers increasingly reach its minimum age limit of 62.
This conference will look at a wide array of servicing situations, opportunities, and challenges. Legislative andregulatory fixes, scratch-and-dent portfolios, REO, best practices, ARM delinquencies, the economy, and risk-basedunderwriting are just a few of the topics on tap for the next two days.
