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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2015

The Shifting Landscape of Mortgage Servicing

The rise of nonbank servicers in the past five years has shaken up the industry

Who’s servicing America’s mortgages? Just a few years ago, the answer was simple: big banks. But regulations, the prospects of new capital requirements, higher servicing costs and reputational risk have made servicing less attractive to large, regulated institutions in the past few years.

As the megabanks stepped back, new entrants, often backed by private equity, aggressively entered the market to fill this gap. Their rapid growth has attracted scrutiny from regulators and federal mortgage agencies, and is creating uncertainty within the mortgage-servicing rights (MSR) market.

Mortgage brokers should be aware of where their loans are going after closing, because when clients have problems with their mortgage servicers, brokers can get caught in the backlash and lose future referrals. Unfortunately, in today’s servicing market, the answer is murky at best.

Where we are today

In 2010, more than 80 percent of Ginnie Mae single-family issuance was from depository institutions. Four years later, there was nearly an even split between banks and nonbanks.

Around that same period of time, three new entrants — Ocwen Financial Corp., Nationstar Mortgage and Walter Investment Management Corp. — each aggressively grew its share of overall mortgage servicing by acquiring MSRs on both a bulk and flow basis. For the most part, the sellers were large banks looking to reduce their exposure to servicing and smaller, nonbank originators monetizing the value of their MSRs to offset lower origination income.

By early 2014, four of the top 10 mortgage servicers were nonbanks, and by mid-2014 these nonbanks were servicing 35 percent of Ginnie Mae’s $1.5 trillion in single-family loan debt. From fourth-quarter 2013 to fourth-quarter 2014, around 60 percent of the banks on the top 50 servicers list saw their servicing levels decline, while almost 75 percent of nonbank levels increased.

The state of the market is now in flux, and a number of
developments could impact MSR valuations near term.

What’s behind this market shift? The regulatory oversight of servicers is one major factor. The aftermath of the mortgage crisis brought with it consent orders from the Office of the Comptroller of the Currency (OCC), the creation of the Consumer Financial Protection Bureau (CFPB), settlements meted out by the Department of Justice’s office of the Attorney General and servicing alignment initiatives issued by the Federal Housing Finance Agency (FHFA).

The extension of the Home Affordable Modification Program (HAMP), with its requirements to make additional attempts to modify and remodify defaulted loans, presented another regulatory hurdle — one that is further lengthening already long foreclosure timelines.

As you’d expect, complying with all of these new rules has significantly increased the cost of servicing. According to the Mortgage Bankers Association (MBA), over a five-year period, the cost of servicing a performing loan went from $59 per year to $156; nonperforming-loan costs increased from $482 to $2,357 per year.

Add to these issues the prospect of having to hold more capital against MSRs, which is what the Basel III requirements call for by 2019, and it’s little wonder why some large banks are reducing their exposure to mortgage servicing and selling off their MSRs.

The appeal of MSRs

Two or three years ago, the market for MSRs was significantly smaller than it is today, with only one or two active flow buyers, but demand and pricing strengthened beginning in 2013. From the buyer’s perspective, the quality of MSR assets increased thanks to tighter underwriting standards. Moreover, historically low coupons suggest that these assets will stay on the books longer and be subject to less rate volatility than past MSR trades.

Unlike traditional banks, whose servicing platforms were designed for high-volume, low-risk loans, the largest new entrants began as high-touch special servicers and thus seem better equipped to deal with today’s higher servicing costs. These new servicers use nontraditional structures to handle MSR transactions, including excess servicer fee transactions, MSR sales with sub-servicing arrangements and MSR financing. This last, relatively new option enables some independent mortgage bankers to borrow against the value of their MSR assets and still retain a portion of them — rather than selling them outright.

More online

Read more about recent mortgage servicing rights guidelines

 

The growing market share of these new, largely unregulated entrants to the servicing market has created concerns among regulators and federal mortgage entities. Last year, for example, New York state’s Department of Financial Services took the unprecedented step of freezing a large MSR transaction. 

Shortly thereafter, the Department of the Treasury’s Financial Stability Oversight Committee (FSCO) recommended that state regulators work together, and in coordination with CFPB and FHFA, to develop governance standards for nonbank servicers.

Since then, the CFPB has updated its mortgage transfer bulletin to add clarification on what it expects from participants in MSR transactions and both FHFA and Ginnie Mae have issued guidance on their procedures in MSR sales and transfers. FHFA also has proposed new minimum eligibility standards for sellers/servicers, including minimum net worth, capital ratio and liquidity standards for nondepository sellers/servicers.

Earlier this year, Ocwen settled with New York state after its CEO stepped down and the company agreed to pay $150 million. The company went on to sell more than $80 billion in servicing assets. This higher level of scrutiny and the ongoing challenges faced by Ocwen, and other new entrants, has had a chilling effect on the MSR market.

The state of the market is now in flux, and a number of developments could impact MSR valuations near term. These include:

  • Lower mortgage rates
  • FHA’s mortgage insurance premium cut, which is expected to drive refinancing
  • Supply-and-demand fundamentals of the market, especially in light of the news surrounding Ocwen
  • New FHFA nonbank servicer liquidity requirements

•  •  •

Liquidity is still available in the MSR market, but it is being used judiciously. Buyers and sellers are now concerned about counterparty risk, and investor and servicer profiles. Although rates have been less volatile than they were this past January, buyers are still focused on the flat yield curve and the prospect of rate volatility. As we near the halfway point in 2015, one thing is clear: The answer to the question of who is servicing America’s mortgages is anything but simple. 


 


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