REperform: New insights

HousingWire held its first REperform Summit, a mortgage servicing conference, Oct. 3-5 in Dallas. Mortgage servicers came from around the country to learn more about the latest issues in the industry and to learn best practices from some of the leading experts. We bring readers an abbreviated version of some of the hot topics that attracted some of the biggest names in the industry.


Housing goes back in time as boomers hit retirement

Housing will never return to pre-crisis levels with baby boomers aging and the next generation lacking the population numbers to support the credit and homeownership expansion that occurred in the decades leading up to the credit meltdown, Christopher Whalen of Tangent Capital Partners said.

Whalen said the U.S. economy since the 1980s managed to substitute spending in other areas by leaning on housing.

“This is significant because if you look at the factors that drove housing, the biggest one was the baby boom,” Whalen said. “The population growth after the boom basically drove consumption, and we had this remarkable increase in demand for housing.”

But Whalen said the boomers heading into retirement are leaving smaller populations behind them, making it unlikely housing will ever get back to the peak levels experienced before the 2008 financial crisis.

Brian Montgomery, chairman of The Collingwood Group, said the nation can “expect mild to moderate improvement in the housing market.”

Home prices are ticking up, but Montgomery conceded that rules drafted to fix housing, including the Consumer Financial Protection Bureau’s qualified mortgage rule, are still going to have a dramatic impact on the market.

While presidential candidate Mitt Romney wants to repeal Dodd-Frank, Montgomery is not counting on it. “Unwinding legislation is extremely difficult,” he said. “It’s almost impossible to unwind the CFPB, but it doesn’t mean you can’t try to soften what they are trying to do.”


Galante: FHA will not participate in REO-to-rental

Federal Housing Administration Acting Commissioner Carol Galante said the FHA will not initiate an REO-to-rental program similar to Fannie Mae’s.

The Federal Housing Finance Agency recently announced winning bidders for the Fannie Mae pilot program.

“Looking at an REO-to-rental strategy, and while a rental strategy is very important, we decided it wasn’t the best solution for the FHA, servicers, borrowers and their communities,” Galante said.

With 700,000 delinquent mortgages in the FHA portfolio, a better solution to work through these loans is to sell the notes, she said.

For national buyers of the mortgages, the borrowers cannot be foreclosed on in under six months.

Galante didn’t give a time frame on when the sales will take place. Galante said the aim is to offload about 10,000 delinquent mortgages per quarter.


Fannie to streamline loss-mitigation for mortgage servicers

Executives from Fannie Mae say they recognize the loss-mitigation process has become complex for mortgage servicers and borrowers.

Leslie Peeler, vice president of Fannie Mae, said current documentation requirements could prove overwhelming to servicers.

“What we are looking to do is eliminate the pieces of the process or reduce the pieces that are not critical to reach a decision,” Peeler said.

Peeler said the GSE recently reduced the documentation requirements for borrowers who are more than 90 days delinquent.

“Once a homeowner is that delinquent, they don’t need to establish that they have a hardship,” she explained.

Bill Cleary, vice president of the credit portfolio strategy for Fannie Mae, said major efforts under way to help servicers. One is the “Know Your Options Customer Care Program,” which provides servicer employees with scripts to use when interacting with borrowers and assistance in putting quality control measures in place.


It’s a risky world out there for mortgage servicers

Mortgage servicers will need to convince investors that they’ve addressed all risks if they want to be successful at convincing hedge funds or others to buy their loan production, a banking  analyst said.

Christopher Whalen, senior managing director of Tangent Capital Partners in New York, said risks have increased since the financial crisis due to a number of factors, including litigation over mortgage-backed securities and the recent national settlement between state attorneys general and major mortgage servicers.

“The best thing for the servicer to do is to have really robust underwriting standards, documentation, customer support and be able to essentially control the entire process — not just to manage their own risk as an enterprise,” Whalen said.

Mortgage servicers, he said, will have to show investors they have been very attentive to all these risk factors.

And they will need to ensure investors that they can maximize the net present value of mortgages by serving the consumer and protecting investors from having an asset that is just sitting in limbo, he said. Today’s anemic housing situation includes a fair number of investors who are sitting on bad residential mortgage-backed securities who haven’t sued to recover losses due to the complexity and cost to do so, Whalen said.

Resuscitating the housing market necessitates that mortgage servicers convince investors in nonagency paper that their rights will be protected, he said.

Other risk factors in the marketplace include the still-pending Basel III capital requirements for banks, Whalen said.

Basel capital requirements will be more restrictive than the old leverage tests.

“I think the U.S. ought to drop out of Basel entirely,” he said. “Basel is something whose time that has come and gone.”


Carrington CEO: Those who control the risk should control the RMBS

Bruce Rose, the CEO of Carrington Holding Company, said that the next generation of private-label securitization should revamp current, common pooling and servicing agreements.

The new versions, he predicts, will be a new standard where the equity-piece holder, the riskiest tranche, gets to decide the fate of the loans if performance wanes.

“The idea is to maximize proceeds to the trust, and this does not include maximizing the benefit to the triple-A investor,” remarked Rose when questioned on whether he felt PSAs could do with some change.

“The guys who holds the risk (should) withhold the risk for the life of the trust,” he added.

In Carrington RMBS deals, Carrington is normally the riskiest investor. Another company owned by Rose also insures the notes. So critics often argue that this structure may lead to conflict.

Rose didn’t hold back on criticizing other aspects of the mortgage servicing business.

He was particularly hard on the national attorneys general settlement for robo-signing that is meant to set better standards for mortgage servicing.

“I don’t think any of the settlement did anything for the benefit for the borrowers,” Rose said.

Mortgage servicers discuss the new frontier of compliance

Servicers in today’s environment are riding a treadmill when it comes to keeping up with new regulations and compliance requirements to meet the needs of not only the government-sponsored enterprises, but other state and federal regulations. 

So how do they do it?

A panel of servicing executives credited technology solutions, tight quality control provisions and constant communication with their frontline staff for ensuring compliance with new servicing guidelines.

“What has changed is the system is a lot less forgiving,” said Gagan Sharma, president of BSI Financial, an Irving, Texas-based mortgage subservicer.

Sharma said human error is part of the normal course of business. But to lessen the risk in a heavily, regulated compliance-oriented environment, he recommends “having consistent and frequent communication to the frontline staff.”

Dave Vida, president of loan servicing at Denver-based mortgage services provider LenderLive, noted that expenses tripled in the compliance and quality control areas because of all the rules and regulations the company has to keep up with.

“We have full-time people who are responsible for tracking all of the changes on the GSE level, the federal level and the state level,” Vida said.

Vida’s team hones in on quality control by evaluating everything from the transaction to the valuation.

Alex Villacorta, director of research and analytics for Clear Capital, a data and valuation firm based in California, said while data systems can be fooled, technology is still one of the best ways to investigate transactions and ensure compliance with all regulatory requirements.

Clear Capital uses data to detect risk and evaluate assets.

Information provided to Clear Capital from brokers is put through a couple of servers, and the firm uses algorithms to detect any inconsistencies or layers of fraud. The firm also does an automated valuation on the backend using its own data pulled from comparable properties, surveys and other sources.


California hands trial lawyers ‘nuclear weapon’ to use against mortgage industry: legal expert

The Homeowner Bill of Rights launched in California not only changed hundreds of years of real estate law, it may have turned the West Coast state into a judicial foreclosure state with financial firms on high alert, legal experts claim.

“In California, they just gave trial lawyers a nuclear weapon to use against the industry,” said Bob Jackson, president and attorney at Irvine, Calif.-based Jackson & Associates.

“The Homeowner Bill of Rights is the most massive change in the last 100 years of real estate law,” he said. “It used to be servicers were in the business of enforcing simple contract law. What the loan servicer did is they enforced the contract, but that is no longer how the game is played.” The bill of rights, which was legislation designed by California Attorney General Kamala Harris, gave borrowers standing to legally address violations of the new foreclosure legislation. 

The law bans dual-track foreclosures, requires single point of contacts for distressed borrowers and imposes civil penalties for the filing of multiple unverified documents, otherwise known as robo-signing. The robo-signing provision essentially means a law firm cannot file a notice of default or another foreclosure-related action unless a servicer has reviewed the filings to verify them, Jackson said.

Jackson said the bill created several new areas of concern for servicing shops. The first is the potential to be sued for wrongful denial of a loan modification. Firms also can be sued if a loan modification was denied because of a mistake made in the process.

With any document misstep leading to the possibility of litigation, Jackson said the hedging strategy would be to file judicial foreclosures, bypassing the common practice of nonjudicial foreclosures in California.

“You need to start looking at your foreclosure timelines,” Jackson said. “Judicial foreclosures get rid of 80% to 90% of this stuff.” He asserted, “[T]he bill will turn California from a nonjudicial foreclosure state to a foreclosure state.”


Nation’s foreclosure crisis caused by “bubble fever” not lack of data, FDIC economist says

The foreclosure crisis was not the result of exploding option ARMs, poor housing policies or a lack of data.

Instead, Paul Willen, senior economist and policy adviser for the Federal Reserve Bank of Boston, blames it on a bubble fever that infected borrowers and financial institutions alike. “It wasn’t the insiders who deceived borrowers and investors,” Willen said.

In fact, Willen suggests all of the common causes typically assigned to the downturn are wrong.

First and foremost, he says the adjustable-rate mortgages blamed for loan payment shocks were not new to the marketplace.  And the majority of borrowers who lost homes had fixed-rate mortgages or had already defaulted before the ARMs reset. 

No documentation loans, where borrowers provide no paper evidence backing their creditworthiness, also shouldered some of the blame. But Willen shot down that narrative saying “the idea of low documentation mortgages is not new.”

To prove his point, he pulled out an ad from the 1980s, which clearly promoted no documentation home loans.

It’s also wrong to suggest the investment banks had no clue about the possibility of a meltdown, the Fed economist asserted. In fact, Willen uses 2005 data from the now defunct Lehman Brothers to prove this point.

Lehman apparently conducted stress tests of mortgages inhouse. Under a meltdown-worst case scenario, the investment bank reached an outcome on subprime mortgage deals where lenders could end up foreclosing on one-third of the loans in the pool.

“The analysis underscores investors’ knowledge about the sensitivity of subprime loans to adverse movements in housing prices, and it refutes the idea that investors did not or could not determine how risky these loans were,” Willen wrote in his research report.

So why did Lehman moved forward anyway? Like homebuyers who anticipated rising prices, Willen said the investment bank minimized the likelihood of a complete meltdown situation.

“In particular, the meltdown scenario—the only scenario generating losses that threatened repayment of any AAA-rated tranche—was assigned only a 5% probability,” he said. The takeway from the study, Willen said, is “bubbles are like earthquakes” and no one can predict when they will happen.

“Asset prices go up and then they come right back down,” he added. Willen warns interest rates could also rise.

“It’s especially dangerous when everyone is confident nothing will happen,” he said. “That is when the system is really vulnerable.”


The new standard for mortgage servicing

 The business of making and servicing residential mortgage loans has been evolving very rapidly.

Most of the attention so far has been focused on consumer issues and the robo-signing settlement. But the changes to the loan servicing model are far broader and more significant.

The first thing which needs to be said about the robo-signing settlement is that the primary beneficiaries are not consumers, but politicians. State AGs such as Kamala Harris in California are using the rubric of “consumer protection” to advance their political fortunes. 

The recently passed California Homeowner Bill of Rights, for example, is a disaster for the California real estate market. It converts the largest single housing market in the U.S. into a de facto judicial state in terms of foreclosures. As California attorney Bob Jackson notes, the Bill of Rights criminalizes some errors by loan servicers while making it more difficult for investors to foreclose on homes in the event of default by borrowers. 

If you look at the problems in the Northeastern states and the difficulty banks and investors have in foreclosing on defaulted mortgages, we should ask how the California Bill of Rights is really helping homeowners in that state.

Some of the standards imposed by the robo-signing settlement make sense and should have been in place long ago. The requirements for a single point of contact, adequate staffing levels and training, better communication with borrowers, and appropriate standards for executing documents in foreclosure cases, ending improper fees, and ending dual-track foreclosures for many loans are all commonsense initiatives. 

Another development that is very significant in the robo-signing settlement is the effective rollback of state-law preemption by federal bank regulators.

For several decades, the Federal Reserve and the Office of the Comptroller have been creating a safe harbor for banks that effectively made them exempt from regulation by state authorities. The robo-signing settlement provides for state AG oversight of national banks for the first time. National banks will be required to regularly report compliance with the settlement to an independent, outside monitor that reports to state AGs. 

Servicers will have to pay heavy penalties for noncompliance with the settlement, including missed deadlines and other errors. And perhaps more important, the increased state-level regulation of banks and nonbanks operating in the loan servicing market will increase costs and the potential for civil litigation. 

Under the AG settlement, for example, servicers must create and retain loan documentation in a comprehensive way and be able to produce loan documents for state and federal regulators. 

Perhaps the most important factor and the least understood is litigation, both by investors and the state AGs. The lawsuit filed against JPMorgan Chase by New York Attorney General Eric Schneiderman regarding loans and residential mortgage-backed securities sponsored by Bear Stearns is the most recent in a series of lawsuits brought by investors and other parties. 

In addition to legal claims, investor preference is driving changes in the loan servicing sector, both on the part of private investors and the government agencies that purchase and guarantee loans.

As Kevin Kanouff of Statebridge noted, just the state licensing and net worth requirements from the GSEs now represent a significant barrier to entry for new servicers. 

Another factor that is not well understood is regulatory initiatives such as the Dodd-Frank law and the new Basel III capital standards. Basel III threatens to impose new capital requirements on mortgage lending and servicing activities that will gradually force banks to change their business models significantly. 

The Basel III capital framework will create new opportunities for nonbank lenders and servicers. Hundreds of billions of dollars in new capital will need to be raised over the next several years to rebuild the nonbank mortgage sector.

First, loan originators are going to increasingly retain their production and act as servicer with respect to nonconforming loans. The role of third parties is likely to decline in the sense that the originating lender is going to have a very strong incentive to retain the MSRs. 

The increased legal requirements and liability associated with lending and servicing are going to make it far more expensive for a third party to acquire MSRs. Just imagine the representations and warranties that a seller of MSRs will need to make to an investor in order to cover the potential liability created by the AG settlement and Dodd-Frank, to name just two factors.

Second, a servicer must have the legal authority to manage a loan portfolio, including short sales, modification and foreclosures. This is not just essential to protect consumers with respect to the AG settlement. It is also required given state laws like the California Homeowner Bill of Rights, but is also a key part of protecting the investor who acquires an interest in a mortgage note.

A servicer must be able to manage a portfolio in such a way as to maximize the present value of a mortgage note. This marks a major change in how legacy RMBS have been structured and managed prior to the start of the subprime financial crisis.

Third, a servicer must have the capacity to stay in contact with the borrower and make sure than they understand the intention of the borrower. The days of sending delinquent borrowers notices in the mail are over. The standards in the AG settlement, plus the requirements of investors, are going to compel servicers to keep their hands on all borrowers and thereby maintain a current understanding of the intent of the borrower. 

If the servicer is going to perform its legal responsibilities to both borrowers and investors, then understanding the intent of the borrower is essential. As the legal requirements for lenders and servicers evolve in coming years, how banks and nonbanks address operational challenges are also going to change.  



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