There's no longer much leeway in how to handle mods, especially in a transfer, Wingspan's Robert Shiller said.
There's no longer much leeway in how to handle mods, especially in a transfer, Wingspan's Robert Shiller said.

Key government stakeholders are watching servicers with increased scrutiny to ensure they're handling loan transfers in a manner that doesn't disrupt borrower and investor payments and is compliant with a slew of new regulations.

The Federal Housing Finance Agency's inspector general has expressed concern over servicers' ability to deliver payments from large delinquent loan portfolios on a timely basis to Fannie Mae and Freddie Mac. Ginnie Mae raised similar concerns, particularly on transfers handled by servicers with limited experience managing government loans, and went so far as to nix a Bank of America transfer because underlying loans lacked proper documentation.

In addition, the Consumer Financial Protection Bureau warned in an August bulletin that improperly handled servicing transfers can hurt borrowers by delaying, for example, the trial modification process. Also, in private-label residential mortgage-backed securitizations, transfers have at times negatively affected payments to bondholders.

The takeaway from all this scrutiny is that servicers must understand they don't have as much leeway as they did in the past in terms of how loss mitigation processes are managed and decisions on individual borrower cases are made, particularly during servicing transfers. Secondary market participants must also embrace this new dynamic to avoid potential risks in loan trades.

"Back in the day, there were some investors who said things like, 'We're going to modify everyone in Michigan.' Those days are long gone," said Robert Shiller, a senior vice president at special servicer Wingspan Portfolio Advisors (not the Yale economist).

"You have to give everyone the opportunity to do a modification, and if they don't follow your waterfall process and they don't qualify, then obviously you can move down a legal strategy," he added. "But it's not pick-and-choose anymore. As the servicer or special servicer, there is absolutely a fiduciary responsibility on our behalf to offer every single option to the homeowners."

While regulatory standardization does exist on a nation level, some federal rules are still evolving, and other rules vary among local jurisdictions. Servicers also have to account for differences in borrower situations and modification types. Problems can arise in a transfer if a player doesn't make sure ahead of time it has the capacity to account for all these nuances in a compliant and efficient fashion during the loan onboarding process.

Prominent servicers are trying to reduce the volatility in securities performance that can occur during transfers, although there may be a limit to how much they can do, said Roelof Slump, managing director in Fitch's U.S.RMBS group.

"For example, both Ocwen and Nationstar have stated that they will make a concerted effort to recoup any determined over-advances over a period of time so as not to negatively affect the transaction, especially investment-grade rated bonds," he said. "However, the servicers have stated that this is not always possible for the servicer to determine, as there may be other servicers in the deal or the influence of stress assumptions may be unknown to the servicer."

But, Slump added, "Among most servicers, there has been an increase in the awareness of the impact of servicing transfers, both to mortgage borrowers and to investors in the related securities. In general, servicers have tried to address these issues through training and enhanced technology."

Black Knight Financial Services, which has a 55% market share of outstanding U.S. first mortgages on its servicing system of record, has developed tools to assist with onboarding loans during a servicing transfer. But it wasn't until new regulations took effect and concerns about transfers started to mount that some servicers began putting more emphasis on leveraging technology, said George Fitzgerald, Black Knight's executive vice president for core servicing.

"There is a lot of functionality that we've built to ensure there's not a disruption in service, especially for a defaulted borrower," he said.

"Once the B of A transfer was blocked by Ginnie Mae, that raised awareness," added Ken Knudsen, head of consumer lending strategy at Fiserv, another large core banking and mortgage systems provider. "When that happened we had a lot of people asking questions."

Fiserv finds increased interest in its functionality that automatically tracks and compares loan documents and data. The technology creates efficiencies by only requiring manual intervention on inconsistencies flagged for review during a servicing transfer, he said.

Some Wall Street firms have recently shown more interest in updated technology that double-checks the completeness of the files in new or legacy mortgage assets they securitize or trade, said Matt Lichtner, an executive vice president at Decision Ready.

Wall Street players are concerned about the regulatory attention being paid to the impact that servicing transfers have on borrowers, said Lichtner, whose company provides automated checklists and audit trails used in quality control and quality assurance efforts.

"They know the scrutiny is now on how those customers are handled," he said. But some are still using no more than spreadsheets for their checklists, he added.

When it comes to seeking additional consulting, training or technology to address the increased scrutiny of servicing transfers, the response from both buyers and sellers in the servicing rights market is mixed, said P-R Stark, senior principal at consulting firm Promontory Financial Group. And automation alone isn't a panacea to this challenge, she said.

"Using technology to facilitate compliance is a good strategy, but firms need to know their systems are actually supplying compliant outcomes," Stark said. "That requires testing, interpretation and oversight, and you are never going to achieve a fully automated process, especially in default servicing."

Adding to the problem is that competition for expertise in this area is heating up.

"There's a demand for specialized servicing knowledge as buyers and sellers of servicing rights build teams to govern high-risk aspects of transfers, such as the sale of loans with pending modification applications," she said. "The demand for talent of that kind in the marketplace is intense."