What is it like to be a subprime servicer in today's climate? As you might imagine, a primary observation relates to substantially higher volumes of delinquency, default, foreclosure and real estate owned (REO).
‘When you read about subprime hot spots or about what's happening to performance among the various vintages, our portfolio pretty much mirrors what's going on in the industry,’ says William E. Rinehart, Ocwen Financial Corp.'s vice president and chief risk officer.
‘Our portfolio is a cross-section of multiple securitizations. We have over 400 PSAs [pooling and servicing agreements] for loans that we service in over 400 pools,’ he adds. Also, the properties securing the portfolio's mortgages are dispersed nationwide, and the portfolio is diverse in terms of originator, issuer and securitizer.
At the end of the third quarter of 2007, Ocwen administered a $56.4 billion portfolio comprising more than 460,000 loans. Nonperforming loans – those more than 90 days delinquent – represented more than 14% of the portfolio.
A year earlier, that nonperforming figure was just over 9%. Rinehart notes that, at that time, the company had about an 80% success rate in helping severely delinquent borrowers avoid foreclosure. Today, he maintains, Ocwen is still experiencing a similarly high success rate despite the substantial increase in nonperforming loans.
Quite simply – although easier said than accomplished – Ocwen has expanded its loss mitigation staff significantly over the past year. In large part, the company hired and trained individuals from outside the company rather than shifting personnel from other servicing areas to loss mitigation.
The positive results, Rinehart says, have much to do with Ocwen's technology platforms and robust loss mitigation scripting tools. With solid technology in place, the servicing segment is able to engage new hires in high-level training and quickly produce efficient, effective loan counselors.
Of course, thousands of loans securitized among hundreds of pools equates to numerous unique servicing guidelines at the PSA level. However, a couple factors have aided Ocwen in handling these circumstances. First, the myriad investor rules are embedded in the company's servicing system, which removes the burden of deduction from loss mitigation staff's shoulders. Also, the vast majority of Ocwen's PSAs present a plethora of loan workout options, and the investors themselves are cognizant of what is at stake in the current environment.
‘The investors are generally quite aware of what's going on in the industry, and quite supportive of us making the right economic decision for the pool of loans,’ Rinehart says. Ocwen is tasked with maximizing the economic value of the loans it administers, but he believes that this responsibility does not conflict with home-retention efforts. Foreclosure and REO, after all, are unwanted outcomes for all parties.
Most PSAs give Ocwen critical flexibility in loss mitigation. And today, Rinehart remarks, that flexibility tends to manifest itself via loan modifications. A very small number of Ocwen's PSAs prohibit these options, and even if they do, a loss mitigation specialist can seek an exception on behalf of a borrower with a compelling economic profile. In general, investors are receptive to such requests.
‘It's been an interesting evolution,’ Rinehart comments. ‘We are doing many more modifications today.’
A year ago, Ocwen was performing far more forbearance plans. But these plans were implemented in the context of borrowers' temporary financial troubles, which is very often not the reason for default today. As the industry knows well, an adjustable-rate mortgage reset resulting in a 30% or 40% monthly-payment increase is a much deeper, often insurmountable, obstacle.
Pursuing loss mitigation with a distressed borrower is sufficiently difficult for both the homeowner and servicer. But a new breed of delinquent borrower – the speculative real estate investor – is exacerbating the situation.
Rinehart has seen substantial servicing issues related to speculative investment, which boomed in 2005 to 2006, and the mortgage products that encouraged individuals to make these purchases with little or no money down. Now, many of these loans are upside-down.
He notes that such borrowers do not have emotional attachments to these houses. That factor, coupled with unpaid principal balances exceeding what properties are worth, has driven throngs of residential real estate investors to walk away from their mortgage obligations.
And of course, it is difficult – if not impossible – for Ocwen to make contact with these individuals.
Soft housing markets crushed many real estate investors' hopes. The same elements – depreciating housing values and a supply/demand imbalance – have made REO management and disposition more onerous.
Areas of Nevada, Ohio, Michigan and California represent the softest of the soft markets, Rinehart says, which creates headaches for managers dealing with existing REO portfolios. But day after day, those portfolios are also growing, further complicating matters.
Today, steadily increasing REO volumes are walking in step with consistently deteriorating housing markets. Marketing times are substantially protracted in some areas, as REO assets compete with existing housing stock and new homes on the sales market.
‘We are evaluating our processes constantly,’ Rinehart comments, noting that the REO silver bullet has yet to be found, and likely will never be discovered. There is simply too much variability among housing markets.
Nonetheless, effective REO marketing and disposition is a moving target for Ocwen. Rinehart suggests that servicers work more closely with local real estate agents to identify ways to distinguish REO properties and price assets correctly. Managers should test strategies such as auctions and property enhancements in certain markets, recognizing that REO disposition is contingent upon the individual property and local market.
