Servicing industry veteran Phillip Comeau checked in with MortgageOrb this week to address a few timely inquiries related to subprime servicing, credit counseling and the fall of Bear Stearns.
Comeau spent years with Freddie Mac before striking out on his own venture. Today, he is serving as a consultant to HOPE NOW and aiding Computer Sciences Corp. with some of its servicing-related technology.
Q: Subprime servicing is clearly difficult these days. But aside from the obvious, with what factors are these organizations contending?
Comeau: They're still hamstrung by the PSAs [pooling and servicing agreements] and the risk of litigation. They have, effectively, ‘tranche warfare.’ If they do something they perceive is for the benefit of the whole trust, it may [actually] be benefiting the first-loss piece at the expense of tranches higher up in the pecking order. That's one issue.
I think another issue is second liens – the complexity of doing a workout when the second mortgage is an ‘orphan.’ [The servicer administering the first mortgage does not handle the second mortgage.] A lot of these second mortgages have been securitized in various trusts, and many second-mortgage holders are still trying to play hardball – impeding the ability to do the workouts that are really needed today.
Q: What's the latest at the higher end of the credit spectrum?
Comeau: Alt-A is stampeding into problems. I think stated-income loans are performing miserably, and they continue to get worse. As the combination of subprime and Alt-A loans goes bad, it has the effect of ‘collateral damage’ on prime. It starts to be a situation that feeds on itself.
The other problem is that many [prime] borrowers have perfectly legitimate hybrid loans, and they would love to refinance into fixed-rate mortgages. But they're not able to because underwriting standards have gotten so tight. Also, spreads on mortgage-backed securities are at historic wides. Interest rates are much higher than they would normally be, given where the 10-year Treasury is.
Q: Can you describe the roles HOPE NOW and credit counseling agencies are playing in today's servicing environment?
Comeau: Borrowers are more apt to call a neutral third party that is, basically, representing them and trying to facilitate some sort of resolution. The other advantage that counseling agencies have is that they can seek a holistic solution to borrowers' financial problems.
But one of the things that's changed over the last year is that the counselors have become much more knowledgeable about what's needed to be a facilitator of helping borrowers with mortgage problems, specifically. You get far fewer ‘false positives’ – counselors sending information into the servicer and investor when a workout is just not viable. That uses up critical resources of both the servicer and the investor.
The industry is overwhelmed. So, at this point, anything will help – in terms of obtaining meaningful borrower contact.
Q: The big news this week is JPMorgan Chase's buyout of Bear Stearns. Two strong servicing operations, Chase and EMC Mortgage, are in the mix. Any observations?
Comeau: How it will play out is anybody's guess. But I was glad to see JPMorgan Chase step in to buy Bear Stearns. The last thing the market needed at this point was for Bear Stearns to fold – where it sounds like where they were heading.
