Archive for March, 2010
Arvin Wijay is CEO and founder of Retreat Capital Management, a loan modification and REO management company.
Arvin also served with Morgan Stanley (MS: 18.56 +2.26%) as an executive vice president in production and strategic management. In this role, Arvin was an integral part of the acquisition, for $706m, of Saxon Mortgage. Upon completion of the acquisition he was responsible for transforming this small mortgage company and servicer to a Wall Street quality company.
If you're a smaller servicer, what do you need to do to not only survive the new and drastic changes in the default space, but also make a profit?
To survive and be profitable, smaller servicers must identify and focus on their core function in the industry. Are you a primary or specialty servicer? Even with the best employees, small servicers can’t do everything, particularly in the current environment with its rapid changes in consumer behavior and legal and infrastructure requirements.
Any tasks and activities that are temporary in nature, which are not adding core value, need to be outsourced in order to create the greatest efficiency company-wide. Outsourcing allows smaller servicers a cost- and time-efficient way to access expertise, processes and technology. Focus and smart spending will maximize efficiency and lead a smaller servicer to survival and profitability.
What sort of predictive modeling are servicers and banks using to forecast foreclosure figures? And how are they being used to court fresh blood from the secondary side?
Although there is variability in the level of sophistication, banks and servicers are relying primarily on standard roll rate and regression models to forecast foreclosure figures. Generally, their models incorporate mortgage data and generic credit information – such as FICO scores – to get a rough estimate of delinquency progression and frequency and timing of foreclosure.
How different is that from the past?
It was acceptable to know generically if borrowers paid their bills. In today’s environment, however, effective performance modeling can’t rely on a generic payment score. To be successful now, banks and servicers need to know if a borrower will make their mortgage payment.
To accurately predict mortgage payment behavior, models must capture the higher order interactions that exist among granular borrower credit information, mortgage data and demographic information.
By integrating predictive models with these attributes, servicers will have an effective, proactive default management tool. Proven results will have secondary market investors courting servicers rather than servicers courting secondary market investors.
Has the foreclosure crisis, in a way, sparked a hiring spree – at least in the servicing space?
Yes, most definitely. A lot of servicers have responded to the added volume and activity by hiring more people. The issue is that the solution isn’t simply hiring people – it’s about taking the time to profile the type of people then focusing on hiring and training the right people for the task.
We've heard of some of the larger servicers hiring ex-McDonald's employees to help modify loans. How important is it for these servicers to hire quality people and why?
It’s absolutely critical to hire the right people. Loan modifications are a universe unto themselves. Experience isn’t the only important issue. There’s also training and internal skill sets. Hiring ex-McDonald's employees isn’t the issue, even though facilitating loan modifications is a lot different from making hamburgers. Any individual hired, whether a former employee of McDonald's or not, needs to have the experience, skills, temperament and training in order for a servicer to be successful. If loan modifications aren’t done the right way – if there is some error in processing or underwriting – the outcome could have a huge impact on financial risk, not only for the servicer, but for the investor and borrower as well.
Current Fannie Mae and Freddie Mac mortgage-backed securities are likely to retain US government backing should Congress create a new system for financing US homes, Federal Reserve Board chairman Ben Bernanke said on Wednesday.
The comments follow speculation earlier this month bondholders in the mortgage funding giants seized by the government could ultimately lose some of their investment.
"My assumption is the mortgage backed securities which are already outstanding will be grandfathered and will retain the US government backing that they currently have," Bernanke told lawmakers on the US House Financial Services Committee.
"At some point there will be a change in the structure and there will be no more of the current type of MBS created. But the existing MBS I assume will be protected until such time as they either expire or are purchased back," Bernanke said in response to a question about the future of Fannie and Freddie.
Republicans are charging that the Obama administration has cooked the books on its home mortgage rescue program to make it look like it's a success when, they claim, it is actually a flop.
Even some Democrats are starting to doubt whether the Home Affordable Modification Program is an historic success or a colossal failure.
The Obama administration announced last week that banks were finally becoming more generous to desperate homeowners and the number of mortgages granted lower finance rates had increased in February by 45%.
Now that over 1.3m homeowners have received offers to participate in the program, the administration said they are now more than a third of the way towards reaching the plan's goals.
Like many Americans, Jon and Laura Hagar are searching for a lender to refinance their home loan. But banks are leery of the Hagars. Their rural Colorado house is made of 17,000 old tires.
A niche mortgage mess is brewing in homes made of earth, tires, concrete and trash. Environmentally minded people built them, hoping to conserve energy and to re-use what might otherwise wind up in a landfill.
Such sentiments in some cases have been no match for the new resolve of the banking industry in the wake of the housing bust. Banks have become much pickier about examining sales of comparable homes, in deciding whether and how much to lend. Owners of odd homes can be out of luck.
The Hagars built their 2,700-square-foot house by stacking tire bales—five-foot-wide blocks of compressed tires—to form the exterior walls. They plugged gaps between the bales with cans, bottles, plastic plates, and other junk and moved in toward the end of 2008.
"We lovingly call it the trash house," Ms. Hagar says. The Hagars covered up all that trash with concrete, clay and stucco and installed south-facing windows to capture light, heat and views of the snowy slopes.
The Federal Reserve left the fed funds rate in the zero to 0.25% range at its March meeting. This is the 15th month that the Fed has maintained rates at an all-time low. At the conclusion of the meeting the Fed stated that it will keep rates near zero "for an extended period of time," so no rate increase should be expected for at least several more months. Examining how the Fed reacted to past recessions can provide investors with some insight into when the Fed will actually change to a more restrictive interest rate policy this time around.
According to the official record, the previous US recession took place between March 2001 and November 2001. This recession was unique in that it is the only one in US history where consumer spending didn't drop and it was also one of the mildest recessions on record. Fed funds bottomed at 1.00% in June 2003 – 19 months after the recession was supposedly over. The backdrop was very low inflation. News reports of a jobless recovery were common even in the fall of 2003 and there was great concern at the time because the unemployment rate was at the 6% level (as opposed to 10% today). Fed funds remained at a low point for 11 months, so the Fed started raising its funds rate 30 months after the recession officially ended. If we optimistically assume that the current recession ended in July 2009 because GDP turned positive in the third quarter of the year, this would imply Fed funds would start rising around January 2012.
The recession before the one in the early 2000s took place between July 1990 and March 1991. Fed funds bottomed at 3.00% in September 1992 – 18 months after the recession officially ended.
Billionaire Californian gubernatorial candidate Meg Whitman has addressed potential conflicts created by her broad holdings in businesses regulated from Sacramento — distressed mortgages, oil exploration and alternative energy among them — by suggesting that she would place her entire portfolio in a blind trust if elected.
But unloading that political baggage may not be easy.
Whitman's vast fortune is spread across scores of carefully guarded funds that function as money harbors for the world's wealthiest individuals, and they can't be liquidated quickly. Experts, including the Republican candidate's campaign attorney, say getting out of some of the funds could prove impossible any time soon.
Whitman may be bound by contracts she signed obligating her to hold some of the investments for years, and some funds might be difficult to unload due to the scarcity of buyers willing to take her place.
Under state law, governors are considered to have full knowledge of their investments — and therefore full responsibility for potential conflicts of interest — as they existed before a blind trust was established.
