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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Servicing

Mortgage industry investors should watch customer service

In the race to put the Great Recession behind, don't forget the past.

September 20, 2013
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Here's what to watch for.

In 2007, banks in Europe dealing with mortgages were advised to improve customer service. I was there, at that conference in Barcelona.

They were told that delinquent loans needed to be handled both aggressively and fairly. People having trouble paying need incentive to pay and need to be engaged, according to my source who worked at Invesco at the time.

Of course, everyone looked at him like he was crazy. After all, mortgage servicing is a concept lost on Europeans. So, of course, no one listened and everything went downhill. No one would expect borrowers to run for the door if and when prices collapsed. "I can't see an end to this, can you?" a banker asked me, laughing.

Later that evening, I attended a lavish party at the beach hosted by Bear Stearns.

So, what did we learn from these mistakes? Or rather, are we learning from these mistakes?

Orange Capital is asking for a specialty MSR vehicle for PHH (PHH), like Ocwen Financial (OCN) and Nationstar Mortgage (NSM). Presumably this vehicle would be a place to park delinquent mortgages. This is a great idea for those interested in seeing stock go up. It's worked very well at Ocwen. But, we have to wonder how the specialty servicing will be handled in an environment of rising delinquencies.

Compass Point seems to think the special vehicle is a great idea, despite PHH not being modeled precisely as Ocwen and Nationstar. The concept is transcendent enough to work at PHH. Fair enough, but Compass Point isn't analyzing the human factor. And I think this could be an oversight.

Additionally, with the recent PennyMac (PMT) private-residential mortgage backed securitization, the DBRS pre-sale sounded a similar risk, in my interpretation.

The pre-sale highlights the nascent nature of Penny Mac as a private issuer: "PMC is a relatively new securitizer of prime jumbo loans and, as a result, has limited performance history on these loans."

And DBRS also notes the Trustee, Christiana Trust, a division of Wilmington Savings Fund Society, "has relatively little experience with residential mortgage securitizations."

Look it's a new deal, and the market waited a long time, and expected all of this.

My point is that it is now more important than ever to consider the well being of the home owner. A robust customer service center should be on the investor's radar. It is not clear from the information being provided to the HousingWire newsroom if any of this is being taken into consideration.

DBRS is not as concerned as I am. "For the entire pool, the weighted-average liquid reserves for the loans are $302,000, enough to cover over five years of monthly mortgage payments," write the analysts.

This logic will remain strong in today's housing market. However, if prices crash again and values plummet, Penny Mac just securitized a huge demographic of potential strategic defaulters.

Each investor needs to ask: Who should be managing this risk?

There is an entire cottage industry of servicers who wish to take over these mortgages in securitized pools. There are companies with a history of handling these kinds of loans when they go bad. If anything, both PHH and PennyMac should name a potential partner in a joint venture to handle any troubled mortgages that pop up. I won't name the firms, because they are all competing for positioning, they all want to get in front of the PHH's and PennyMac of the mortgage world. So, I won't play favorites by listing names.

There is logic to the statement that those who fail to learn from history are doomed to repeat it.

Well, no one is going to benefit from a repeat in our recent economic history.

In the race to put the Great Recession behind us, however, it is tantamount in importance not to forget the past.

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