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Politics & MoneyInvestments

Nonbanks changing RMBS, MSR servicing landscape

New normal: More aggressive loan mods, oversight

It’s been a year of great change and the new normal is emerging for residential mortgage-backed security servicers, especially those focusing on the severely delinquent mortgage loans segment, according to the findings in the Fitch Ratings quarterly servicing index.

Last year saw the migration of portfolios of non-agency RMBS mortgage-servicing rights from banks to non-banks like Nationstar (NSM), Ocwen Financial (OCN) and Walter Investments (WAC), along with increased usage of subservicing arrangements. 

Nonbanks now service 72% of non-agency deals. Large nonbank servicers such as Ocwen and Nationstar have absorbed much of this product, with their total servicing portfolios growing by 250% and 100%, respectively, over the past 12 months, says Fitch Analyst Matt Shaw.  

The servicing portfolio transition reveals distinct differences in strategy between these two servicer types. 

“Nonbank servicers are proving to be more aggressive in their monitoring of principal and interest advances,” said Fitch Managing Director Roelof Slump. “Nonbank servicers are also showing themselves to be more proactive in their use of loan modifications and are seeing shorter overall timelines.”

Shaw says that these differences in servicing strategy are affecting both monthly cash flow and ultimate loss severities. 

“While bank and nonbank servicers have reduced the amount advanced on delinquent loans, the advancing rate for banks stabilized in 2013 and recently showed some slight improvement for nonbanks,” Shaw said.

However, “Relative to banks, nonbank servicers are advancing on fewer loans and are deeming further advances non-recoverable with more regularity, which is also allowing recovery of prior advances,” Slump said. 

Shaw reported that the Office of Mortgage Settlement Oversight announced this month that Bank of America (BAC), Citigroup (C), JPMorgan Chase & Co. (JPM) and Wells Fargo (WFC) had all completed their consumer relief and refinancing obligations required by them under the National Mortgage Settlement Agreement.

Ally Financial (ALLY) had earlier met the requirements of the agreement. However, significant aspects of this agreement were captured in the Consumer Financial Protection Bureau’s rules that took effect in January for all mortgage servicers,” Shaw reported. “This in turn placed nonbanks under greater scrutiny than what they had seen previously.”

Shaw says that along with the increase in oversight, the nonbanks will be faced with higher fixed costs as necessary technology and process enhancements are made to ensure compliance with the new guidelines.

“Higher fixed costs will continue to act as an incentive for these entities to grow their portfolios.  In contrast, commercial banks remain incented to control the overall size of their portfolios and reduce their servicing of underperforming loans,” he reported. “Therefore, strong forces are still in place to further incent both outright MSR sales and subservicing arrangements, thus heightening scrutiny of such transactions.”

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