Servicing is a hot topic. Many believe that it's time for companies to recognize that retaining servicing, at least a portion of their production, is going to be necessary going forward, especially for mandatory sellers. This will be a clear advantage for those with good cash reserves versus those without, but also impacts the comp plans for capital markets staffs everywhere since servicing is profitable into the future, not now. Part of that, of course, is subservicing. There are numerous subservicers, of course, although the one that usually come up in conversations are Cenlar, Dovenmuehle, BankNewport, BSI Financial, ServiceLink, and Marix Servicing. A few weeks ago it was announced that C12 Capital was looking for a new partner to manage its DHM Mortgage Servicing arm, although it likely would maintain some ownership in the unit. DHM was established last year, largely to service whole loans held by Barclays, but it is licensed to do business in several states. Formed in 2010 to service whole loans in the Barclays book, DHM has a $1.1 billion servicing portfolio is anticipated to run off about five years from now, but the parent company is looking to set a direction for the division before that happens.

MIAC Client Solutions Group has been busy promoting the sale of servicing portfolios. Recently it was a $632 Million FNMA reverse mortgage servicing portfolio ($164,240 average loan size, 100% FNMA reverse mortgage loans, 100% FHA HECM’s, weighted average interest rate of 3.271%, weighted average loan age of 27 months, concentrations in Florida and California). This week it is a $133 Million GNMA multifamily servicing portfolio from an East Coast commercial real estate lender ($14.7 million average loan size, retail, weighted average interest rate of 4.58%, weighted average loan age of 9 months). And Interactive Mortgage Advisors (IMA) is selling $186 million of Ginnie Mae residential loan servicing from the Northeast ($253,619 average loan balance). In the third quarter, Fannie Mae bought back mortgage servicing rights from Bank of America covering $74 billion in unpaid principal balance: 11% of the Fannie loans being serviced by BofA.

Servicer behavior in non-agency loans continues to have a significant impact on valuations, especially in subprime. There are meaningful differences in foreclosure timelines, modifications and advancing across servicers, per Barclays Capital. “Furthermore, ongoing consolidation and resulting servicing transfers should also continue to drive valuations, especially in weaker credit sectors. Relative servicer performance remained more or less consistent in 2011 versus 2010, with loans serviced by Ocwen, RFC, Wells, and Aurora continuing to move relatively quickly through the foreclosure pipeline. In contrast, processing times for loans serviced by Bank of America remained long."

If the states and the large servicers work out some agreement, they’ll need someone to monitor compliance with it. And it appears that ex-FDIC Chairman Sheila Bair is a front-runner for the job. Supposedly selection of a monitor is one of the final issues to be worked out between the banks and state and federal officials. She has not been sitting on her hands since leaving the FDIC earlier this year, having written a book and being a senior adviser to the Pew Charitable Trusts. The monitor would ensure compliance with any agreement, according to a settlement proposal offered to the banks in March: http://www.businessweek.com/news/2011-12-12/sheila-bair-said-to-be-top-pick-for-foreclosure-accord-monitor.html.

If the 50 state attorneys general and five largest bank servicers reach a settlement over past foreclosure practices, the industry is hoping that this could lead to some standardization in servicing practices and reporting. And just like with appraisals, and documentation, most believe that such consistency is necessary for investors to understand and compare servicer modification/foreclosure procedures.

Servicing transfers, acquisitions or management changes can lead to striking changes in performance, like when Ocwen bought HomeEq and the servicing speeds on HomeEq-serviced loans fell to levels similar to those for Ocwen-serviced loans. Watch for similar thing from companies like Litton and Saxon once Ocwen ramps up servicing on these portfolios. Usually investors prefer deals serviced by large servicers over those serviced by small servicer, given larger servicers’ more consistent and predictable practices, lower stop advance rates, lower likelihood of servicing transfers and higher potential for rep and warranty settlement proceeds.

Part of servicing is dealing with foreclosures, also a hot topic. FHFA, on its own behalf and as conservator of the government-sponsored enterprises Freddie & Fannie, has filed a lawsuit in the U.S. District Court for the Northern District of Illinois against the city of Chicago to prevent enforcement of the city’s recently amended “Vacant Buildings Ordinance” against the GSEs. “FHFA reluctantly took this action after undertaking efforts to discuss these matters and to seek alternative solutions to the problem of vacant properties that the ordinance seeks to address. FHFA indicated that the ordinance could affect costs for homeowners in the city.” Las Vegas has a similar law, and the Chicago ordinance would impose on the Enterprises “the responsibilities, but not the benefits, of ownership of vacant property on which they hold mortgages. The ordinance would create risks and liabilities for the Enterprises at a time when they are already supported by taxpayers, including those in the city of Chicago. Additionally, the ordinance would subject the GSEs to the regulation and supervision of the Chicago Department of Buildings instead of the FHFA, as Congress intended.” You may recall that the ordinance requires mortgagees to pay a $500 registration fee for vacant properties, requires monthly inspections of mortgaged properties to determine if they are vacant, and requires the GSEs to pay the registration fees and to comply with these maintenance requirements even when the Enterprises have not foreclosed upon a property, and therefore, do not have ownership of the property. If the GSEs fail to comply with the ordinance, the city may levy fines and penalties of up to $1,000 per day.

The MBA has let the FHFA and the nation know that it doesn't want to see any changes to the mortgage servicing compensation. No one has made a compelling case for why the current model needs to be tweaked. “MBA President and CEO David Stevens said the group agrees with the government that there is a need for improvements for all participants of the mortgage underwriting and securitization processes” per HousingWire. “However, we believe that any change to the current servicing compensation model is unnecessary to accomplish these goals," he said, noting, “radical changes in any of the major structures underlying the existing TBA market could reduce liquidity in the TBA." The MBA prefers a cash reserve structure, which calls for deferring some existing fees to cover servicing costs for "catastrophic economic and default situations."

And “private” companies are engaged as well. For example, United Capital Markets modified its website www.ucm-inc.com to include an “Industry Issues” page. This page addresses the FHFA Servicing Compensation Initiative and includes links to the original proposals, the UCM responses, and the MBA’s letter to FHFA (12/8/2011). The comment period ends on 12/27/2011. “This is a vital topic because the proposed FHFA ‘fee for service’ will radically change the economics of originating and servicing loans, eliminating SRP and reducing the profitability of the mortgage business. Everyone should care and weigh in on the debate.”

For now, enough about servicing. This week we have $66 billion in Treasury supply to absorb, with yesterday’s 3-yr going ok. This morning we had Retail Sales +.2%, a tad weaker than expected, and later we’ll have the wrap up from the 1-day Fed meeting (don’t look for anything new). Recently the benchmark 10-year T-note yield has been range-bound, as traders like to say, closing Monday at 2.01%, and investor focus will remain on Europe although U.S. news has been relatively positive.

Looking at mortgages, “substantial buying from money managers, hedge funds and real money accounts over the past few weeks has left the street scrambling to find bonds amidst diminishing year-end liquidity - flows were the lightest seen in months with the only active accounts those being forced to trade (i.e., originators, the Fed and the UST).” The size of MBS purchases analysts estimate for the third quarter range from $250 to $750 billion. Monday MBS prices were marked higher/better by less than .125. We’ll have a $21 billion 10-yr note auction later along with the Fed announcement. Before, and after, the Retail Sales data the 10-yr is sitting around 2.05% and MBS prices are worse by about .125.

Two fish are in a tank.
One turns to the other and says, ‘Do you know how to drive this thing?’