For laughs all you have to do is read the news, and this story will fit right in with anyone’s 5th grade sense of humor. The Union Recorder reports on a story about Ellen DeGeneres being sued due to her making jokes about a Georgia Realtor's name. Some might ask, how can a person refrain from it? I won't, however, and leave it up to the reader to form their own impression. In other, not-so-funny, legal news, the former president and CEO of Virginia's Monarch Mortgage was indicted this week.
Are storm clouds gathering in the market for mortgage servicing rights? Some industry insiders are suggesting that it could be the perfect storm of the unintended consequences of regulation and a supply & demand mismatch. During the Viet Nam War, a popular bumper sticker asked, "What if they gave a war and nobody came?" Some are asking, "What if originators produced servicing and nobody wanted it?"
As this commentary mentioned nearly a month ago, banks are staring at the Basel III rules barreling down on them. As banks know this will impact the amount of servicing that can be held, and it will be interesting to see how this plays out in servicing values. Different types of loans will carry different weights in terms of capital requirements, and overall banks will have caps. Lenders are starting to ask the large bank aggregators such as Wells Fargo, US Bank, and Chase about their long-term appetite for servicing - both purchased through TPO channels or brought in through retail branches.
These same banks have seen their TPO volumes grow nicely in the last few months as a) non-bank investors, who arguably were paying too much for servicing in 2015 in anticipation of rising rates, have scaled back the price they are paying for servicing - back with the peloton, and b) the co-issue bid price for servicing, where lenders sell the asset directly to Freddie or Fannie and then divert the servicing to companies like Pingora, Lakeview, Roundpoint, Seneca Mortgage Servicing, or the like, has also dropped...and in some cases disappeared entirely. Given that co-issue execution, until recently, accounted for over 60% of the servicing sales, in effect by-passing the bulk bidding process by some firms, this drop in demand can't but have a material impact on servicing values, and therefore the price to consumers.
Mortgage rates dropping .25% since the Fed's mid-December short-term rate increase hasn't helped the bid for servicing either. Lenders who have reported earnings for the first quarter of 2016 have seen huge markdowns on their servicing book, directly hitting their balance sheets and revenue. The rate movement, coupled with consistently increasing servicing costs and subdued capital raising prospects among most buy-side private money firms, has dampened pricing and decreased demand. And servicing a loan is more expensive than some originators thought it would be.
As Steve Fleming from Phoenix Capital pointed out, "Sellers of servicing rights must also consider the bulk vs. flow dilemma. Many of Phoenix Capital's clients who regularly monetize MSRs chose to engage in flow transactions the past years, leaving few of them with substantial bulk selling needs presently. A flow transaction minimizes a seller's exposure to the negatively convex MSR asset in declining rate environments and spares them the distress of largely untraded bulk transaction attempts." Bulk & mini-bulk transfers have represented about a third of total servicing transfers. (Cash-window servicing released, primarily through the Freddie Mac CSR program, accounts for about 5%.)
And yet, on the supply side of the market, the mortgage "factories" of originators continue to churn out units, and each unit must be serviced. Michael Ehrlich with ThomsonReuters recently sliced and diced the numbers, and reported that "The top non-bank servicing sellers were Stearns, loandepot.com, CMG, Prospect, Fairway Independent, and Impac, while the top depository bank sellers of servicing were Flagstar Bank, PrimeLending (PlainsCapital), Discover Home Loans, Fremont Bank, and Provident Savings Bank.
Of course small and mid-size lenders immediately see that many of these companies selling are the same companies that are buying servicing from them! Welcome to the world of servicing transfers, as smaller companies sell to larger ones, and larger ones fine tune their portfolios or take advantage of pricing inefficiencies to sell portions of their servicing book. Of course loan officers hear from their clients and field questions as the consumer receives servicing transfer letters.
There are several factors a seller needs to consider when looking at co-issue vs mini-bulk flow servicing options. In co-issue transactions where the servicer is identified at the time of lock, such servicing transfers will not require the RESPA notification for a change in servicer. This is true even where the first payment is taken by the servicing seller. Mini-bulk transactions will require borrower notification of a change in servicer as per RESPA. Generally, only sellers with their own in-house servicing platform will sell servicing flow mini-bulk (pool servicing and sell at end of quarter). If using a sub-servicer, then it is usually operationally advantageous to co-issue rather than sell mini-bulk.
Of course other issues and events impact the value of servicing. State-level delinquency and foreclosure laws & timelines impact values. Servicing tends to be less valuable in states where servicers have lengthy and expensive procedures to complete; servicing values are different for FHA & VA loans versus conventional conforming. And for any company that actually uses program guideline drivers to assess servicing costs, (and not just the value of average note rate against par.... Along with loan amount, state, etc...) the recent change in the HUD Handbook will affect FHA servicing values. This will most likely affect servicing value in states where T&I are high - Texas, OR, CA properties with Mello Roos, etc., and also judicial foreclosure states where the servicer has to advance T&I for a longer period of time while the foreclosure is resolved in courts.
This basically means that servicers will have to carry unpaid T&I cash advances on their balance sheets with no ability to charge interest for those advances to the delinquent borrower, who is in effect 'borrowing' the money by not making their payment. 'FHA: HUD Handbook 4000.1 issued March 14, 2016 - For mortgages assigned a case number on or after March 14, 2016, the Mortgagee may assess a late charge, not to exceed 4% of the overdue payment of Principal and Interest....'"
But what if these larger companies, accustomed to selling billions of dollars of servicing every quarter, can't find a ready outlet for the asset? What if there is no natural buyer of servicing? What if banks of all sizes, due to Basel III, either must sell servicing or can't buy any more through correspondent or wholesale channels? What if non-bank servicers, due to regulator-imposed capital restraints, can't buy any more? The laws of supply and demand are relatively harsh, and the price will drop. And the price decline will be seen by smaller and mid-sized lenders as well, of course. Capital markets staff have already seen a drop in the value, and therefore price, of servicing. And of course this flows quickly to the prices that consumers see on rate sheets. We are already seeing this happen.
What changes might impact servicing values, and therefore prices to consumers? Assuming the supply won't be adjusted, that leaves the demand for servicing. And that demand is function of regulatory factors, potential liability in servicing, liquidity, and capital requirements. Talk to your regulator!
Pools of servicing continue to be offered, and purchased. For a couple quick examples, MIAC is the exclusive rep for a $299M FNMA/FHLMC/GNMA MSR portfolio. The portfolio is being offered by a mortgage company that originates loans with a geographic concentration in Texas. The seller will be providing full reps & warrants for the loans. The portfolio characteristics are: $181,814 average loan size, 99.86% FRM, 62.15% FNMA A/A, 0.58% FHLMC ARC and 37.28% GNMA II, 4.379% WAC, weighted average loan age 11 months, 708 WaFICO, 100% retail, with a geographical concentration in Texas. Bids are due June 15th on this package.
Phoenix Capital's Project Arcade is a $83M FNMA & $8.5M GNMA servicing rights package. The conventional portion of the deal is 100% FNMA A/A, 75% Fixed 30, 25% Fixed 15, WAC of 3.921% (F30)/3.411% (F15), $202K average loan balance, Top States: TX 78%, CO 12%, OK 8%, 749 WaFICO, 78% WaLTV, 89% Owner Occupied. The government portion is 82% FHA, 18% VA, 0% USDA, 100% Fixed 30, WAC of 4.384% (F30), $156k average loan balance, top states: TX 82%, CO 9%, OK 4%, 657 WaFICO, 96% WaLTV, 92% purchase, with 100% Owner Occupied properties.
And this week Mortgage Industry Advisory Corporation (MIAC), offered up another one: a $1.5 billion FNMA and FHLMC mortgage servicing portfolio. "The portfolio is being offered by a mortgage company that originates loans with a national geographic concentration. The Seller will be providing full representations and warranties for the loans included in this offering. Key portfolio characteristics include: $173,497 Average Loan Size, 97% fixed rate, 79.13% FNMA_A/A and 20.87% FHLMC_3_ARC, Weighted average interest rate of 4.23%, weighted average delinquency rate of 3.29%, weighted average loan age of 15 months, weighted average FICO of 733, 99% Retail/Direct, with a national geographic concentration. (Bids are due 6/22.)
Besides the value of servicing, what else makes up rate sheet prices? The mortgage-backed security market, of course. And Thursday was another relatively quiet day. As I mentioned yesterday, aside from a little intra-coupon movement, and some small shifts between agency MBS, not much happened to impact rate sheets in any kind of meaningful way after we saw improved prices at the start of the day. The Fed continues to help support the market by using monies from early payoffs of existing securities to buy $2-3 billion of various agency securities of various coupons.
This morning we've had nothing in the U.S., and little news overnight, but at 7AM PDT we have some minor University of Michigan Sentiment Index figures. Thursday started and ended with the 10-year yield around 1.68%; this morning it is at 1.66% with agency MBS prices better by .125.
Jobs and Announcements
In wholesale personnel news Michigan Mutual "is thrilled to announce that George Andrews, Michael McCarthy and Rocky Amaral have joined the company's Wholesale Sales team in the West! George (408.498.5370) is welcomed as Regional Sales Manager, responsible for their Northwest Region including Northern CA, OR, and WA, reporting directly to Al Crisanty, Director of Wholesale Lending. Michael and Rocky have joined George's team as Account Executives. Mike (541.291.9980) is based in Oregon and Rocky (408.421.4284) is based in Northern California. Michigan Mutual's management is very excited to have them on board as they continue to build and expand their National Sales Team. Please contact George if you are a talented wholesale AE in the territory and are looking for an exciting opportunity in sales." Michigan Mutual, Inc., an agency direct/seller/servicer/issuer headquartered in Port Huron, Michigan - currently licensed in more than 30 states.
A premier national retail mortgage banker is seeking a proven mortgage regional manager for the South Eastern Market. The ideal person is a highly motivated and proven sales professional to lead a segment of the company's developing South Eastern market. "The candidate must possess a make-it-happen attitude, high integrity and extraordinary leadership skills to mentor both veteran and less-experienced loan originators and help them deliver top performances from all members of the sales team. A demonstrated history ofsuccessful territory and account management by meeting sales and profitability targets, as well as recruiting top talent, leading regional marketing efforts, establishing new markets and generating incremental revenue is important." Qualified candidates should inquire through me and I will send your information along. (Please specify the opportunity.)
For ops folks, New American Funding's continued growth has created the need for an Operations Center in Tampa, FL and new branch in Tempe, AZ. "We are hiring in multiple departments in Operations for Funding, Processing, Underwriting and more! The company is committed to its steady expansion reaching out to consumers and real estate partners nationwide and is in need of experienced and Licensed Loan Officers for both its retail branches across the nation and regional call centers in Tustin, CA, Riverside, CA, Tempe, AZ, Plano, TX and Southfield, MI. With their continued growth, New American Funding, is rated as one of America's Top 100 Mortgage Companies by Mortgage Executive Magazine six years in a row." To see a list of openings please visit www.newamericanfunding. com/careers, email your resume for consideration to Baron Obrien, VP of Talent Acquisition (877-478-5476).
Congratulations to attorney and California MBA board member Michael Pfeifer who Lenders Compliance Group has appointed Director of Mortgage Servicing Compliance. Michael is currently counsel to the California Mortgage Bankers Association, served on its Board of Directors for nine years, and has, although he doesn't look a day over 50, nearly 40 years of experience in representing both bank and non-bank lenders, servicers, investors, and industry service providers.