BLOG VIEW: Amid the broader discussions of housing-finance reform and expectations of how the Dodd-Frank Act will shake out, plenty of folks at the Mortgage Bankers Association's (MBA) 97th Annual Convention & Expo – held late last month in Atlanta – offered their observations on how the servicing industry will evolve once it creeps out of its current state of headline pandemonium.
A common theme in breakout sessions and exhibit-hall chatter was that the big financial institutions are increasingly (and finally?) seeing the value in making large-scale investments in servicing – be they investments in infrastructure, technology or personnel. This trend represents a departure from how business was done in past cycles.
In mortgage industry boom years, companies have always been eager to expend capital in the production side of the business, noted former Fairbanks President Bill Garland, who is now a senior vice president at ISGN.
‘And when times are bad – when you really need to have that capability and investment in servicing – there is no money; there is no cap-ex,’ he said in a panel session. ‘I fought that battle for yearsâ�¦That's life in the back end of the business.’
But given the sustained nature of the present downturn, banks and lenders are feeling more pressure to direct resources toward the increasingly high-touch world of loss mitigation. Greg Hebner, president of MOS Group, said his company, which provides loss mitigation support to servicers, averages seven borrower conversations per loan modification file. In some instances, borrowers and workout agents speak with each other upwards of 13 or 14 times – a metric that shatters the traditional servicing business model.
The decision by big banks to direct more resources into servicing isn't a ‘fatal blow,’ The Wall Street Journal's David Reilly wrote this week. It does, however, mean ‘another head wind for recovering banks,’ he added.
The economics of residential mortgage-backed securities (RMBS) must be rethought, added Robert Meachum, executive vice president of Saxon Mortgage Services, at the panel session. Saxon, which dealt the servicing rights on nearly 40,000 loans to Ocwen earlier this year, appears increasingly intent on strengthening its foothold in the specialty servicing space.
Meachum said he was surprised that Redwood Trust's jumbo RMBS deal earlier this year – despite the deal's pristine quality – did not include a carve out for when loans should be moved into specialty servicing. His vision includes an RMBS model where primary servicers' compensation/servicing strips is/are capped at or around 25 basis points and specialty servicers receive performance-based incentives for working out delinquent loans.
Apart from accounting for the increased costs of high-touch servicing, servicing agreements of the future will likely factor in (and try to avoid) some of the more glaring conflicts of interest that exist in current contracts. For example, BlackRock Inc. gained a lot of attention last week after Reuters reported that loans financed through the company's $1 billion BlackRock Mortgage Investors Fund ‘will be handed to a separate servicing firm to ensure independence when recording payments and working with borrowers.’
If and when the secondary market rebounds, how do you envision servicing contracts will look?