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.
Whalen made his comments during HousingWire's REperform Summit, a mortgage servicing conference under way in Dallas.
"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.
"Let's say you are a bank and a small part of your business is writing jumbo mortgages. Under Basel, the risk weight for that loan could be 100%," Whalen said. "If that loan has a 6% to 7% coupon … that's not a bad deal for the bank, but it's going to make it much more expensive and it's going reduce their leverage. So, that bank will be able to make many fewer loans than they could under the old rules."
The global banking community pays lip service to a unified international banking framework, Whalen contends.
"I think the U.S. ought to drop out of Basel entirely," he said. "Basel is something whose time that has come and gone."