Mortgage servicing faces billion-dollar secondary crisis
Mortgage servicers are facing a billion-dollar crisis when it comes to advancing payments and interest to the secondary markets. The problem, according to one panelist providing a mid-year outlook at the American Securitization Forum's annual meeting in Washington, is that mortgage servicers are growing weary of paying for property problems that aren't getting fixed. Heavy foreclosure backlogs and other difficulties in liquidating distressed properties mean mortgage servicers are dealing more and more with negative cash flows in their RMBS portfolios. Mortgage servicers are advancing payments to the secondary markets, even when the properties aren't paying. The assumption is the properties are going to be profitable again, one day. The concern is more and more mortgage servicers doubt this scenerio will actualize. Howard Kaplan, a partner at Deloitte & Touche, said the national average on turning around a distressed property is now more than two years. "If it takes three years to recover, can you imagine the uproar in the markets if servicers stop advancing?" he asked. "Billions and billions of dollars in receivables would stop. This problem will get worse before it gets better." Kaplan said many mortgage servicers are facing problems from expedited acquisition activity in the space. "Major mortgage servicers purchased other firms and didn't realized the problems they inherited," he said. "As long as we have performance issues in these transactions it will consume institutions for a long time." Kaplan said secondary market players should appreciate the constraints mortgage servers face. In addition to principal and interest on distressed properties, the servicer still needs to pay local governments, insurance and cover maintenance costs. "I can't emphasis enough the expense on servicers to keep the lawn mowed, the pool clean and pay taxes," he said. "And it's even more complicated if the home is occupied." Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.