Non-Bank Servicers Under the Microscope - Who Will Service Loans?; HELOC Problems Ahead?
July 1776, the estimated number of people living in the newly
independent nation was 2.5 million. (Nowadays, this is approximately the
number of people on the freeway in Atlanta or Seattle during rush
hour.) The nation's estimated population on this July Fourth is over 318
million. So we should all invest our money in anything that appreciates
with population growth, right?
California has gobs of people, and as California goes, so goes the nation, right? The California State Assembly approved SB 1459.
The bill is now enrolled and sent to the governor for signature or
veto. The California Mortgage Bankers Association "has vigorously
supported the legislation, which will allow use of the Uniform State Test (UST) for California MLOs.
The bill would also modify hourly education requirements, requiring
MLOs to get 2 hours of state-focused pre-license education (as part of
the 20 hour requirement) and 1 hour of state-focused continuing
education (as part of the 8 hour requirement)."
reminded me of a note I received a while back from an LO at a large
bank. "Are any of the guys emailing you about bank registration versus
LO licensing actually producers? I was licensed in more states than
most, and it means zilch. Realtors don't care; clients don't care. Everyone wants the same thing which is to hit contract dates without excuses.
Like everyone else I crammed before the test, bought some practice
exams, did some forgettable education, passed the tests and the next day
I quickly forgot it all then went back to originating. The same goes
for Continuing ED; I click through a bunch of screens and forgot
everything a few hours later. At my bank they flood us with training -
do the vast majority of LOs remember the minutiae? Big producers will
produce regardless of if they are licensed or registered and their
referral sources don't care.
Community Home Lenders Association (CHLA) urged the Federal Housing
Finance Agency (FHFA) to take actions which could facilitate a
transition to mortgage market reform, in a manner that protects
consumers and promotes competition. In a letter to FHFA Director Mel
Watt, the CHLA said that any
transitional actions that FHFA takes should focus on these pro-consumer
objectives, by promoting competition and consumer access to
community-based lenders and by preserving GSE infrastructure to maintain
securitization access and a non-discriminatory cash window.
Specifically, the CHLA urged FHFA to: Carry out its risk sharing pilots
in a manner that preserves competitive access to securitization,
prohibits vertical integration, prohibits volume discounts, and tests
out a risk sharing guarantee at the loan level; conduct research into
the impact of various reform structures on the preservation of a cash
window that meets the needs of all lenders and the consumers they serve;
complete work on a common securitization platform and single security;
adopt immediate G Fee parity and equal terms and conditions for all
lenders; and evaluate access and affordability under different risk
In a story funded by banks, the FHFA Inspector General cited the risks of non-bank servicers.
(Okay, just kidding on that funding note.) But the WSJ notes that,
"Federal Watchdog Says Nonbank Financial Firms May Lack Adequate
Funding". Let's see.... If
banks have Basel III concerns (MSRs hitting 10% of Tier 1 Capital), if
regulators are afraid of concentrating the servicing in the hands of too
few banks, and if nonbanks don't have enough capital to do the job -
well, who the heck is going to service the $10 trillion or so of
residential loans outstanding? Bloomberg also summed up the report. Here is the actual report which singles out servicers of troubled loans.
an unrelated but coincidental story, pop-archeologists discovered the
early set of Creedence Clearwater Revival lyrics for "Who'll Stop the
Rain." It turns out that early versions were actually about loan
servicing. For example:
Long as I remember, the payments been comin' in
Clowns opening the checks, what's the investor's PIN?
Customer whines go unheeded, no one will ever know.
And I wonder, still I wonder, who'll service the loans?
So the report said that a
nonbank mortgage servicer that took on more loans than it could handle
ended up delaying payments to Fannie Mae and Freddie Mac.
The servicer, which the report does not identify by name but everyone
besides me seems to know with certainty, used short-term financing to
acquire a large portfolio of delinquent loans backed by one or both of
the government-sponsored enterprises. This company lacked the
infrastructure to handle so many loans, leading to consumer complaints
and the payment delays, and limited credit availability threatened the
servicer's ability to fund its operations.
FHFA, which runs Fannie & Freddie, is certainly aiming to keep the
FHFA at the forefront of being relevant, and being around regardless of
what Congress does. Russell Rau, a deputy inspector general for audits
and who wrote the 17-page report, recommends that FHFA develop a formal
framework that would include routine exams, reviews and testing to
ensure nonbank servicers can meet current servicing requirements. The
FHFA and F&F have been supportive of banks selling mortgage
servicing rights to nonbanks largely to help struggling homeowners and
to limit the GSEs' own losses.
Lawsky, the Superintendent of New York's Department of Financial
Services, also likes being relevant and has launched separate
investigations into two nonbank servicers, Ocwen Financial and
Nationstar Mortgage. Some nonbank servicers, of course, do not have the
infrastructure to properly service all of the loans they have acquired,
thus "biting off more than they can chew." American Banker notes that
"nine of the top 20 servicers for Fannie Mae loans and seven for Freddie
Mac are nonbanks" and the industry wonders if they are more vulnerable
to economic downturns.
residential servicers are not the only ones taking a hit in the press.
According to Reuters, New York state bank regulators are preparing an
investigation into commercial real estate special servicers, traditionally a fee-intensive business.
The article states that regulators are looking into whether loan
servicers have related businesses that may have conflicts of interest
with bondholders. Reportedly Benjamin Lawsky, the superintendent of New
York's Department of Financial Services, will be leading the initial
investigation. Who are these guys? Starwood Property Trust's LNR
subsidiary is the largest U.S. special servicer with 36% market share,
followed by CWCapital at 34%, and C-III Asset Management at 16%. CMBS
special servicers tend to be buyers of B-pieces in CMBS securitizations
assuming that the first loss position entitles them to be named special
servicer when a loan defaults. Everyone knows that special servicing is a
labor intensive process requiring significant infrastructure and that
the special servicer's economic incentive is to maximize value to the
securitization trust since they receive incentive fees for resolutions.
Fees from borrowers include default interest, modification fees,
extension fees, late fees, assumptions fees, and consent fees, and fees
paid by the CMBS trust include inventory fees, workout fees, and
of major banks are hoping that their HELOC portfolios don't turn into
"troubled" loans. Four federal financial institutions regulatory
agencies and the Conference of State Bank Supervisors (CSBS) issued
guidance to financial institutions regarding home equity lines of credit
(HELOCs) nearing their "end-of-draw" periods, which occurs when the
principal amount of the HELOC must begin to be repaid. The
guidance encourages financial institutions to effectively communicate
with borrowers about the pending reset and provides broad principles for
managing risk as HELOCs reach their end-of-draw periods.
Lots of borrowers will be just fine, but others may find it difficult
to make higher payments or to refinance their existing loans due to
changes in their financial circumstances or declines in property values.
"When borrowers experience financial difficulties, financial
institutions and borrowers generally find it beneficial to work together
to avoid unnecessary defaults. The guidance describes how financial
institutions can effectively manage their potential exposures under
these circumstances. The guidance promotes an understanding of potential
exposures and describes consistent, effective responses to HELOC
borrowers unable to meet their contractual obligations. The appropriate
accounting and reporting procedures for HELOCs nearing their end-of-draw
periods are also discussed: Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods.
Risks are everywhere! On June 25, the OCC published its semiannual risk report,
which provides an overview of the agency's supervisory concerns for
national banks and federal savings associations, including operational
and compliance risks. As in prior reports and as Comptroller Curry has
done in speeches over the past year, the report highlights cyber-threats
and BSA/AML risks. The OCC believes cyber-threats continue to evolve
and require heightened awareness and appropriate resources to identify
and mitigate the associated risks. Specifically, the OCC is concerned
that cyber-criminals will transition from disruptive attacks to attacks
that are intended to cause destruction and corruption. Extending another
recent OCC theme, the report notes that the number, nature, and
complexity of both foreign and domestic third-party relationships
continue to expand, resulting in increased system and process
interconnectedness and additional vulnerability to cyber-threats. The
report also states that BSA/AML risks "remain prevalent given changing
methods of money laundering and growth in the volume and sophistication
of electronic banking fraud." The OCC adds that "BSA programs at some
banks have failed to evolve or incorporate appropriate controls into new
products and services," and again cautions that a lack of resources and
expertise devoted to BSA/AML risk management can compound these
concerns. Finally, the OCC expressed concern that competitive pressures
in the indirect auto market are leading to an erosion of underwriting
standards. The OCC's supervisory staff plans to review retail credit underwriting practices at banks, especially for indirect auto loans.
now that the World Cup is out of reach for the United States, we can
all go back to watching the bond market tread water, right? But there
was some movement to the downside Tuesday as traders talked about
sellers hedging locks ahead of the unemployment data Thursday and the
holiday Friday. MBS prices ended the day worse between .250-.50,
depending on coupon on maturity.
But it is a new day! We will have ADP
for June. Its correlation to the official numbers is always
questionable, but it is expected at +179k. We also had the weekly MBA
apps numbers, which were -.2% last week and down 37% for the year. Later
we'll have Factory Orders - does the market care? For numerous, Tuesday the 10-yr ended the day at 2.56% and now it is at 2.55%; agency MBS prices are a touch better.