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Special servicer Fay Servicing is now seeing strong growth in its private-label securitization (PLS) business. Since late 2013, the company has been designated as the servicer on six PLS transactions backed by more than $1.2 billion in mortgages, including re-performing, nonperforming and new-issue prime jumbo products.

Helping to drive this growth is the fact that Fitch Ratings recently affirmed the company’s residential subprime and special servicer ratings of RPS3 and RSS3, respectively, with an upgrade to “outlook positive.” In addition, Standard & Poor’s recently re-affirmed the company’s residential subprime and residential special mortgage loan servicer ranking of “average” and “outlook stable.”

During a recent interview with Servicing Management, Ed Fay, company founder and CEO, says he expects to see more seasoned product being rated in 2015, which, in turn, will present new opportunities for Fay Servicing to grow its PLS business. What follows are excerpts from our interview:

SM: We saw the recent announcement that Fay Servicing is seeing strong growth in its PLS business. Can you tell us more about what’s driving that growth and the mix of loan products that you’re focusing on?

Fay: We’re taking on a mixed bag of different loans. The first thing would be prime jumbo. Basically, there are some people out there who are looking to hire, for lack of a better term, “quality of care” on their prime jumbo loans. It’s a little bit of a different type of situation with those loans because, yes, the probability of default is very low. But, at the same time, we’re trying to deliver an almost concierge-like service for that product. We’ve done two securitizations so far in the prime jumbo space, where we have taken on the servicing.

Additionally, we’re doing a fair amount of business in the new securitization space of nonperforming and re-performing loans of the past. We just did a $1 billion deal recently - and several last year. When we look at those loans, it’s all about keeping them performing. And when you look at the numbers, if a bunch of those loans go bad, it’s obviously very bad for the bondholder as well as the equity holder in those bonds. I think we’re very well set up to manage those assets. And that’s really helped us grow the business. Right now, it looks like we might get four more securitizations done before the end of the first quarter - and we hope to have a rated securitization done very soon, as well.

SM: How many loans are you currently servicing that are non-qualified mortgages (non-QMs)? What other types of loan products do you expect to be servicing in the future as the market changes?

Fay: We do expect to be working with some folks both internally and externally this year on some new products - kind of an alternative agency program. Now again, I wouldn’t call it non-QM. Everyone is realizing that non-QM is a very difficult space to try to trade in, and there’s not a whole lot that’s getting done in non-QM right now. I think that topic is starting to cool quite a bit.

SM: How close is the PLS market to being “reborn”? It seems like it’s right on the precipice - but the sun, moon and stars still must align. What’s it going to take for the PLS market to truly come back?

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Fay: As an industry, we’re spending a lot of time right now trying to understand which products are going to make sense for the next generation. With non-QM, it’s obviously going to be very difficult in terms of the documentation - with the income statements, bank statements and things like that - until somebody goes to court and defines what the requirements are, especially with regard to the ability-to-repay (ATR) rules. Those loans are not going to go anywhere, in terms of volume, any time soon. For now, those few players that are doing non-QM are sticking to higher-quality credit borrowers. I think that [the non-QM segment] will get fleshed out over the next few years - either lenders will not be in that space at all or there is going to be a lot of opportunity in that space.

Personally, I’m hoping stated documentation loans don’t come back in my lifetime. They don’t seem to make sense, in a lot of ways. If you’re a lender and you end up in court for [alleged] ATR [violations] and the defense shows tax returns to a judge that proves the borrower didn’t make as much as shown in the documentation, then the judge is going to ask whether you are incompetent in underwriting or if you’re helping the consumer defraud the government of tax revenue. I wouldn’t want to be the one answering those questions - and I think that’s why we don’t see folks jumping into the non-QM space very aggressively. But, we’ll see.

SM: You also mentioned loan quality. It’s been said that these minor and often “immaterial” loan defects are holding the PLS market back - that lenders are freaked out about not getting the loans underwritten perfectly and about regulatory action and loan buybacks. It’s not helping on the investor side either; investors are also very concerned about how these loans have been underwritten and what the level of defect is there.

Fay: No doubt - and that is a historical concern. PLS in the future is going to be more finance company-style PLS than it will be subprime. In the past, you had finance companies such as Household Finance, which was around for 138 years, and they didn’t have any problems until they chased subprime. Companies such as The Associates, Beneficial/HFC and American General Finance were around for a very long time serving relatively high-quality but more distressed credit borrowers. And they were underwriting them fully - looking at income and job stability - the true four Cs of underwriting. It was when everyone started chasing subprime that we started to see all the problems. The question is, can the PLS market come back in that space, seeing as it’s really not covered by Fannie, Freddie or Ginnie right now? Over the next few years, we will see if that comes back.

SM: What’s the best-case scenario for bringing the PLS market back? What does Fay Servicing hope for in terms of a best-case scenario?

Fay: Over the next couple of years, we will see an expansion of lending. One of the biggest disappointments, in terms of how the market has changed, is that consumers had three types of lenders to choose from in the pre-crisis days: payday loans, finance companies and prime lending. Today, we have prime lending and payday loans - but there’s no middle ground. Yes, finance companies are more expensive than prime, but they’re also less expensive than payday. Hopefully, we will start to see some expansion into that market.

Anyone who is in non-agency paper is going to demand a different level of care for servicing. We are - at the end of the day - a niche player that is focused on customers that need different types of care, whether that’s a concierge-type service on prime jumbo, special service for loans that have been distressed in the past, or special service for loans that are currently distressed.

Going forward, anything that is non-agency will need to be looked at in two different ways: In the past, servicers taking on these loans used to say, “Hey, it’s non-agency. So be it. We’re just going to have to develop different underwriting guides.” But now, you have to have a 30-year plan. You can’t just underwrite to a certain level and not worry about what happens next. You have to think about how servicing is going to work and how you are going to look at those customers 20 years from now.

Will you be looking at trying to refinance a borrower into some sort of a “cleaner” loan at some point in the future? Or, is this someone who you don’t think is ever going to recover, credit-wise, because he has a job that is seasonal and every winter he falls behind on his mortgage payments when he’s out of work?

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Then again, maybe that borrower always catches up. So, you have to look at it from this perspective: “Hey, there might be new underwriting rules [to accommodate these types of borrowers] that might work.” For example, there are teachers that take the nine-month deal instead of a 12-month salary - but they don’t necessarily represent increased credit risk because of that.

SM: Considering the recent six transactions that you mentioned, what was the mix, in terms of nonperforming and prime jumbo? Also, how do you anticipate the mix of products changing over time?

Fay: A lot of loans are starting to re-perform, and I think a lot of those will be replaced in securities. However, re-performing loans are scary no matter what metric you look at because they have relatively high redefaults across the board, relative to historic defaults. You have to keep in mind that all of these borrowers do not have the ability to refinance into new loans because they were nonperforming in the past - so when they are re-securitized, it can be a very good outcome for investors.

As an investor, whether you’re buying the super-clean front piece of the securitization or holding the final equity, you really want to make sure that these loans get the very best quality of care. And that’s a different setup than most servicers have. This isn’t the same as a brand-new, cleanly originated Fannie or Freddie loan. There is a lot more care required for these types of customers.

As we look forward, we are positioned for anyone who wants a higher level of care for his customers. And we can tailor that for what our clients want. That’s why we have separate teams for each of our clients. And that’s why we are using the SPOC model on everything we do.

SM: Ease of payments is really important today - and, of course, servicers have to have that technology in place. Can you speak to any new initiatives there?

Fay: Good timing on this question because we’ve recently rolled out our new website. Early on, when we were [servicing] mostly distressed [loans], it wasn’t as important to have those options for customers - because you wanted to talk to the customer [in person] in order to find out what was going on. Obviously, [self-service] starts to become important very quickly as you move up, in terms of the quality of credit for the customers you’re serving. So, we’ve done everything from upgrading our auto-pay systems to developing a whole new website.

SM: How diverse is the mix of nonprime or non-QM products in your portfolios?

Fay: To date, there’s not enough volume in [non-QM/nonprime] to say that we’re focusing on any one thing. We’re having lots of conversations with lenders that are thinking about doing non-QM because they know that the servicing piece is important but is still in its infancy. We hope that it starts to grow faster over the next few years. And we hope to see some other alternatives from, for example, some finance companies.

SM: How much time does your firm spend on analysis of this market so that you can forecast your growth? Are you making use of big data to look at the macro trends?

Fay: As a special servicer, there are a couple of things you have to look at when doing your strategic planning. The one thing we are extremely comfortable with is the need for a different quality of care. We’re not a small firm anymore - but we’ll never try to be a big firm either: As a special servicer, we recognize that the infrastructure costs are extreme - from compliance to systems to human resources. You have to have that all in place in order to play this game - even the licensing costs are extreme.

There’s different pockets of assets that you will be able to have access to. The number one priority is just the people who need quality of care - that’s going to be around for while. But as you look forward, you do have to look at the macro side of things. Right now, the market is going through a bit of change. There is the public announcement of the Ocwen mortgage servicing rights sales; you have the Basel III rules coming into play; and interest rates have dropped fairly drastically, which drove the value of servicing rates down quite a bit. So, talk about a perfect tsunami.

Special Servicing

Ed Fay: Growth In PLS Market Creating New Opportunities For Special Servicers

By Patrick Barnard

Fay Servicing has seen its PLS business grow rapidly since 2013.

 

 

 

 

 

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