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Industry witnesses shift to non-bank servicers

More banks back away from MSRs

The market continues to see nonagency residential mortgage-backed securities moving away from banks and into the hands of non-bank servicers, analysts claim.

With additional large mortgage servicing right transfers scheduled to be completed in the latter half of the year, the trend suggests more banks want to distance themselves from distressed or high-risk loans, according to analysis from Fitch Ratings.

For instance, Ocwen Financial Corporation (OCN) not only completed its acquisition of the Homeward Residential and GMAC Mortgage portfolios, but also announced its intention to acquire MSRs from IndyMac Mortgage Services and Greenpoint Mortgage Funding, Inc.

"With the acquisition of Homeward Residential and GMAC Mortgage completed, Ocwen not only materially increased its volume of subprime loans, but added both prime and Alt-A products to its portfolio mix," said Fitch Ratings managing editor Diane Pendley and senior director Thomas Crowe.  

They added, "At end of the second quarter, Ocwen was servicing 47% of all non-agency RMBS subprime loans."

Similarly, Nationstar Mortgage Holdings (NSM) continues onboarding its MSR acquisition from Bank of America (BAC), which was announced back in January.

The second quarter of 2013 also witnessed servicer-related loss volatility as several servicers and master servicers continued to adjust their firm's principal forbearance loss reporting, Fitch stated.

Both Ocwen and Nationstar passed through about $1 billion in principal forbearance-related losses during the quarter as part of their acquisitions of portfolios, the credit ratings agency pointed out.

"This has led to concerns regarding servicer and master servicer reporting and the time of loss recognition," Fitch analysts explained.

They continued, "Fitch believes this reporting issue will continue to drive further loss adjustments in the third quarter."

However, industry professionals have voiced opposition to that characterization, stating that Fitch inaccurately suggested that non-bank servicers had not previously reported forbearance amounts among various RMBS trusts. Those questioning the characterizations note that certain firms have traditionally reported principal forbearance losses at the point of liquidation as opposed to earlier in the process.

Many believe that the companies have correctly reported principal forbearance amounts, aiming to always provide transparency through servicing loans.

Wingspan Portfolio Advisors CEO and president Steve Horne pointed out that while there’s still a huge backlog of inventory to clear through the system, the industry has stepped up in making sustainable progress in clearing out the legal pipeline, but there are still many foreclosures stuck in judicial states.

While Horne doesn’t see an inherent advantage or disadvantage in moving delinquencies through non-bank servicers or bank servicers, the legacy of traditional servicing rights is what the market is currently dealing with.

The issue at hand seems to be a market difference in the time to resolve delinquent loans between bank and non-bank servicers as a result of regulations and staffing levels.

"Over the last few years, an avalanche of delinquency volume came through the system and there was no infrastructure to support it," Horne explained.

He added, "The interesting thing will be that the nature of what a mortgage servicing right is, is going to be revised and bifurcated on servicing the loans and how the industry provides for effective default servicing to an independent provider."

In general, delinquencies and foreclosures continue to decrease, but residential servicers are experiencing issues related to the management of foreclosure and delinquency timelines.

"Fitch believes that it will be challenging for non-bank servicers to maintain shorter timelines as additional highly delinquent loans move from the banks’ portfolios to the non-banker servicers’ portfolios," the credit ratings agency concluded. 

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