Lehman had a conference call on the subprime market last week and expressed concern about whether there would be enough servicing capapcity to deal with all the FCs. Is there any history from the 91-93 period on this topic that is worth studying?
"Roughly 72% of the mortgage originations attributed to Wells Fargo Financial in the league tables for the 1H06 were co-issue originations. None of the co-issue loans are originated or underwritten by WFC. They are originated by investment banks with WFC providing servicing for such loans. The investment banks like WFC being the servicer because its strong credit rating provides better pricing when these loans are securitized and sold. None of these co-issue originations ever hit WFCs balance sheet nor can they be put back to WFC. All underwriting risk is with the investment banks."
and the great info provided (once again) by Tanta, it would seem that the statement above is largely PR. Perhaps they dont have the risk of the loan, but Id think that as a servicer, they have plenty of risk due to the foreclosures and potential for massive REO.
You know, Brian, the last time I really worked closely--I mean, drinking out of the same coffee pot every day kind of closely--with mortgage servicing was in that same period in the first 90s RE bust/refi boom. But, well, that's the thing. In those days, you could--as my employer did--have a $60 billion servicing portfolio and still not just survive but make a living. That kind of portfolio is big enough to be efficient--you can afford to have REO specialists on staff--but small enough that you can mostly service your own loans, in your own market area, where you know the loan documents because you drew them up and you know the RE values because you drive past the collateral every day on the way to work.
These days a $60 billion servicing portfolio is a joke, everyone of that size has been assimilated into the Wells/CFC/GMAC/etc. Borg, and the whole environment is different. Sure, you ought to be able to afford the specialized staff for loss mit, BK processing, REO management, etc. But your collateral is all over the U.S., you remit to hundreds of different investors with hundreds of different rules and preferences for dealing with delinquency, and your loan files are totally uneven and occasionally full of dubious docs and missing the really relevant ones. At some point, the drive to consolidate and build up a "national franchise" meant the utter demise of some of the key ingredients of efficiency. Talk about getting what you thought you wanted and then finding out you aren't going to enjoy it.
You bet some servicers laid off the default specialists during the boom. Hell, we've all been talking about how the "rolling loan" phenomenon kept the originators and new-loan-boarders busy during the boom, while the default servicing group had some time on their hands. So they got pared down, and now they have to get beefed up, and frankly good luck with that. People like me either got other jobs or just aren't interested in going back to the misery of foreclosing on people for the pay that's being offered right now. It will have to go up, and it will go up eventually. But then someone is going to have some explaining to do about the EPS. You know.
I would love to see this "correction" result in some serious de-consolidation and return to regionalized servicing, but I'm not holding my breath on that.
I would just like to add that some servicers seem to try to improve profitability by fixing up their low-balance loans a bit. I have had quite a friends people pop up all of a sudden with misapplied payments once their loan balance drops below $80,000 - $100,000.
That .25% gets smaller and smaller compared to the fixed costs of servicing a loan as the loan balance gets smaller. I genuinely believe that some of the worst of these outfits try to "motivate" refis or prepays on low balance mortgages.
Geoff, that statement is true in the sense that WF doesn't hold the note on those loans, didn't make the reps and warranties, and can't be made to eat the EPDs and fraud cases and so on.
To the extent that the statment skates around the risks a servicer might still bear, sure, it's spin.
That said, though, Wells Fargo--and they're not a big fave of mine, you know, I'm just doing them justice here--isn't just a belt-and-suspenders kind of bank. It's a belt-and-suspenders-and-duct-tape-and-staples-and-a-whole-box-of-Light-Days-Oval-Pads kind of bank. (Hope that grossed out you male persons. Did you know, btw, that the one place in the mortgage biz you're most likely to encounter female execs is servicing? As usual, men get to wheel & deal and we get to post the checks every month.) Anyway, Wells is certainly the best possible candidate I can think of to take what risks are there. I'm not so sure I'd say that so emphatically about CFC or GMAC or WAMU or NCC or some of the other big servicers. "Sloppy" is forgivable in a boom on the origination side but is just a killer on the servicing side.
Thanks for the lesson. The mortgage system is more complex than I realized. This complexity could also be the real achilles heal of the system - with so many involved parties who's chief aim is to carve out a small haircut, while not being on the hook, even a modest rise in bk's from here could cause the system to temporarily seize up under dispute uncertainty. That's what caused the mini-meltdown around LTCM, etc. It wasn't that anybody thought the economy was going to crash, it was growing aversion to uncertain counterparty risk that almost caused the system to seize up. And that was a drop in the bucket compared to the mortgage business. Even if they have little investment risk, it seems to me a pretty good chunk of commercial and investment bank earnings come from underwriting, servicing and insuring cdos and mbs. Where they probably have considerable balance sheet risk from lending to hedge funds that have used cdos, etc as leveraged investments. Maybe there's still hope I'll be able to reasonably afford a Manhattan co-op bigger than my dorm room one day?
Thanks for taking the time to share this information with us, Tanta. It's definitely a common nerd trait to want to know how everything works. As you undoubtedly already knew, you rock!
What happens if different servicers service 1st and 2nd mortgages? I guess it's a mess. It was already mentioned that 2nd holder is almost never interested in approving a short sale.
nuclear waste buyers ... profit on distressed-loan servicing
Sorry, I didn't get this one.
with so many involved parties who's chief aim is to carve out a small haircut, while not being on the hook, even a modest rise in bk's from here could cause the system to temporarily seize up under dispute uncertainty
Turbo, you can copy down that sentence and embroider it on a little sign for your desk, it is so true. I have always had the same problem with securitizations. My thing is this: there is reasonable money to be made in lending people money to buy houses. I refuse to believe that there is, really and sustainably, enough money in it for the originators and the servicers and the insurers and the bond underwriters and a hundred different tranche buyers and swap dealers and my pet kitty to take a piece of the interest. The short reason for why we have a subprime/Alt boom is not that we have so many consumers on whom we must--altruistic souls that we are here on Wall Street, gag me--take such risks. It's because it's the only way to generate enough spiff for the entire ridiculous food chain. When that delusion stops, Mr. Party is very, very over.
StillLearning, "nuclear waste" is the industry's charming term for loans 90+ days past due and REO. NW dealers are outfits that specialize in servicing defaulted loans. A lot of prime lenders, especially small banks, will sell their NW servicing off to the NW dealer/servicers, precisely because they don't have the specialized staff to deal with them profitably. They're all just puking right now because the NW dealers have sniffed the wind and are not going to take that junk off someone's hands for cheap.
One of the things a second-mortgage servicer can do, if it has the capacity, is buy the first mortgage out from the current investor/servicer, so that it gets to foreclose and its principal doesn't get frittered away completely in expenses. But, basically, most of those second lenders are just screwed right now, which in my view will teach them to try to compete with big-ass mortgage insurers in a game they thought would never end.
Tanta, so you were talking about buying/selling NW servicing, not the NW itself, correct? In your earlier comment, did C-BASS as well bid just for servicing only?
I believe that C-BASS usually buys both. That's a whole other day's post--the extent to which some loan sales are "ervicing retained," some are "servicing released," some sales are of servicing rights only, etc.
A rather paranoid person taught me a minor technique that turned out to be very useful. Basically, always make sure person on each side of a money exchange is different. In this specific case, if your bank is part of the same group as your servicer, get another bank account at a different bank, and have your direct payments come from THAT bank. It came in handy for me about 15 years ago as when the service claimed I didn't pay, I sicced my bank on them. Bank on Bank is mutual weight class.
Tanta wrote: "People like me either got other jobs or just aren't interested in going back to the misery of foreclosing on people for the pay that's being offered right now. It will have to go up, and it will go up eventually."
I wonder if these kinds of jobs could be outsourced to India. One of my college friends operates a business that buys defaulted loans from American banks for pennies on the dollar and then uses Indian call centers to recover the money. They make a good living out of this.
Just imagine then. The money came (indirectly to be sure) from China and the foreclosures processed from India. There definitely is a lesson in this somewhere:-)
I seek clarification. The basic economics of servicing compensation is that the servicer gets what is called a servicing fee on each loan equal to a slice of the interest paid.
Is it truly a slice of the interest paid? So, in other words, as MaxedOutMama said, the servicer gets less each month as the loan amortizes?
I should clarify: to my knowlege, C-BASS buys seasoned subprime loans. You can guarantee that a certain percentage of those will become nuclear waste in the future--it is in the nature of subprime loans to do that at a higher rate than prime loans. But the loans aren't NW yet.
That's not the same as an NW dealer who offers to buy the stuff after the worst has happened. So the pricing structure is completely different in that case, and you do see the "pennies on the dollar" bids there.
could I spell it this simple :
before, servicers did not exist, banks were both servicers and investors, the creation of servicing as increased inequality since the cost of servicing are now priced at their marginal cost for each loan, while in the past, the money collected on huge loan was financing the servicing costs of small loans
Bonds go down in price when interest rates go up. The degree to which they do so is measured by 'Convexity' (strictly speaking: the partial derivative of the bond price with respect to the change in interest rates, is normally less than zero).
When interest rates go down, bond prices go up (for the same reason).
Mortgage Backed Securities do not, necessarily, go up when interest rates go down.
This is because when interest rates go down, mortgage holders refinance. And so the MBS holder gets back his or her capital, before he wants/expects it.
Hence negative convexity. An asymmetric response to interest rates.
Analytically, the holder of an MBS has granted the borrower a call option which they can exercise if the MBS starts to rise in value. That is how one normally models these things (can someone confirm this?).
To fight this, investment banks created Collateralized Debt Obligations (CDOs) where the repayment is broken off into 'tranches' of mortgages.
The top tranche is essentially triple A or near enough, typically. The borrowers are very unlikely to default, and to repay-- the tranche is usually protected against early repayment in some way (ie another tranche must be fully repaid, before the top tranche can be repaid).
The bottom tranche (there are normally several, packaged and sold by the investment banks to different investors with different risk-return requirements) is normally called 'the toxic waste'.
In a tough market, the bank has trouble moving that one, the toxic waste. It may have to take it on its own balance sheet. Although it will be 'marked to market' the reality is, if the market is illiquid, there is no market, and it cannot be sold or turned into cash at any price.
In today's wild and crazy markets, hedge funds have been borrowing money from banks to take on CDO tranches-- they are a key part of the market liquidity.
So you have levered holders of CDOs. If something goes wrong, the market could be flooded with low quality MBS/CDO, as the hedge funds (also 'marked to market') will be forced to sell, and effectively the new issue market for MBS will be shut down.
At which point, only banks that keep mortgages on their balance sheet will be lending.
And we will be back to a world of 20% cash down, first mortgages only. The remaining banks will only lend as first mortagors to prime residential real estate, because they will not be able to shift the mortgages off balance sheet and so free up reserves for more lending. This is called a 'credit crunch'.
The housing market will, accordingly, freeze up for some time.
Yes, Holden, that's correct--amortization reduces the servicer's income over time. You make your big money in the first two years or so of the loan--depending on how your operation works and your expense load--and then you just put up with the loan for the rest of its lifetime. One reason that a lot of originators got into selling their servicing rights to start with was because they couldn't manage such tiny margins when the loans weren't refinancing often enough (while increasing the balance) or turning over because of home-move-ups.
Analytically, the holder of an MBS has granted the borrower a call option which they can exercise if the MBS starts to rise in value. That is how one normally models these things (can someone confirm this?).
Yes, that's how one models it. Google "option adjusted spread" and you'll get more than you ever wanted to know about MBS pricing models.
Did you know, btw, that the one place in the mortgage biz you're most likely to encounter female execs is servicing? As usual, men get to wheel & deal and we get to post the checks every month.)
That explains a lot.
My sis graduated from a small but very fine Midwestern liberal arts college in the middle of 70s stagflation - she couldn't buy a job.
In the end she went back to community college to learn how to type & file just to feed herself. Sent out resumes galore & still nothing.
Then one day she got a call from one of those mid-sized regional banks you described asking her to come in for an interview... It's HQ was in St Paul & had branches & accounts in the rather large Latino neighborhood just south of the city.
They had noticed that as part of her 'liberal arts' education she had lived for six months in San Juan PR & for a year in Central America (Costa Rica & El Salvador). She was fully bi-lingual (and not just 'classical' Spanish either, she had slummed).
They wanted her to 'clerk' in the servicing dept & 'support' their efforts in the Latino community... Within six months she had moved up to the front lines... NPL, FCs, REO.
What an education.
Later she went on to law school, went to work as a prosecutor for the DOJ (approx 15 years & all convictions, ugly white collar tax evasion & general corruption... lotsa of them bilingual trials due to the mix of 'clients' often in places like San Juan & Miami)... She is now a professor of law.
Point is she got her start in 'servicing'... If you know of youngsters who are having trouble finding themselves after four years in the clouds... this could be the place. Its pregnant with possibility.
Is it the servicer who also physically keeps all the original paperwork?
Also now I understand why there is so little prosecution for mortgage fraud and deficiency judgments pursued . Because servicers are not interested and/or have the skills/staff to handle. Basically they are the ones who make important decisions but they are not really motivated.
The servicer generally keeps "the servicing file," which has things in it like the application, the verifications of income and assets, the appraisal, and the original closing documents except the note.
The original note is kept by the investor or a third party known as a "document custodian" who has custody of the note (and sometimes a few other critical original documents) on behalf of the investor.
Some servicers are putting the files on CD-ROM so that the person in India you talk to about the problem with your loan can, in theory, look at the documents (the originals of which are probably in Idaho).
The biggest reason that fraud isn't found is because loan sales (the asset or the servicing or both) are so big, and so frequent, and margins are so small, that only a sampling of loan files are actually looked at in detail. The rest of it is putting values on a spreadsheet and running it through some fancy model. Obviously, the "repurchase war" going on is a symptom of that approach.
Absolutely amazing post. This is why I troll the blogosphere for these pearls of real knowledge.
With so many people passing, shedding and spreading so much responsibility it seems not too difficult to imagine how even a minor hiccup could make everything go horribly wrong.
where the people "taking" the rik are not also managing it I simply cannot imagine that there would be an enourmous disconnect.
Further, given the various service providers who may have differing interests, I could also see where the signals to those investors could not become delayed or distorted.
Wow, Tanta, you couldn't get this good of an education at an Ivy League school!
It occurs to me that the wildly inflated prices (10+x DTI), maxed LTVs (100%) and proliferation of I/Os should have really puffed up servicer's cuts. Even if everyone didn't default, a return to historic norms would have to hurt.
Tanta.great post. Do I interpret this correctly that the servicer can usually approve cost effective mitigation? If not the process could be messy for a loan that has been securitized.
"Mortgage Backed Securities do not, necessarily, go up when interest rates go down.
This is because when interest rates go down, mortgage holders refinance. And so the MBS holder gets back his or her capital, before he wants/expects it."
I don't follow you here. MBS' do drive long-term( 30/15 year fixed) mortgage rates. The "spread" between MBS and other bond instruments drive rates. Early pay-offs do affect an investors yield, but not the market itself. Short-term mortgage rates(ARMs) are affected by other forces.
If you are ever in a dispute with a servicer you should get the ball rolling by sending them a RESPA request. Google 'respa request' and you'll find lots of examples.
"We all have a tendency to say stupid things. About seven months ago, some members of the economic fraternity created a lot of noise with widely reported warnings that we were recession bound. Especially outspoken in this respect was New York University's professor of economics, Noriel Roubini."
"In retrospect, those recession forecasts now shape up as pretty outlandish, if not outright dumb."
"Mr. Roubini, the skipper of New York-based Roubini Global Economics, also blundered badly in his market forecast, predicting the onset of sharply falling stock prices in September, with the S&P 500 between then and June of 2007 plummeting some 1.5% to 2%. Following his forecast, about 10 market averages, including the Dow, charged to new all-time highs over the next six months. So (Roubini) flunked on both the economy and the market."
"How does Mr. Roubini explain away his ATROCIOUS forecasting and is he still sticking with his prediction of a recession? Not surprisingly, he doesn't want to talk about that, refusing to respond to repeated calls seeking comment."
Do I interpret this correctly that the servicer can usually approve cost effective mitigation? If not the process could be messy for a loan that has been securitized.
What the servicer can do is very much a question of who the investor is and how the loan is held by that investor. For instance, if the loan is in a REMIC, it cannot be modified at all; a troubled loan in that kind of security has to be bought out of it in order to be modified. Fannie and Freddie will generally let you buy a loan out of an MBS, modify it, and then sell it back to them, but then they're really into loss mit options. Private investors are generally less inclined--or less able, given their security structures--to do that. In any case, a servicer always needs the permission of the investor to modify a loan. With the GSEs, you can have what amounts to "standing permission" to do a range of things to a range of loans, but it's still the investor's call and they can give you "guidance" if you are modifying too many (or too few) loans. Legally, a modification agreement is worthless without the current noteholder's signature on it, so if the current noteholder didn't give the servicer a POA to do mods (which can happen), you literally have to run it by the noteholder.
"Informal" forbearance arrangements of up to three months are generally at the servicer's call--since the servicer will be remitting the interest to the investor, it's the servicer's butt if it doesn't work.
You always have to involve the MI in any of these decisions on an insured loan if you want to assure that you keep the coverage. They're a lot like the agencies: if you're one of their preferred servicers, they'll give you a lot of leeway, but they never let go completely of the leash. (Which is smart.)
What it comes down to in so many cases is the cash-flow of the security. I didn't talk about "excess servicing," but perhaps I should. Perhaps I should do so in the next comment to keep Halo from truncating it.
One of the joys of the good old agency pass-through MBS (and I'm not talking about those extremely complex structured RMBS and CDOs and stuff here) is the comparative ease of matching security coupon to loans. To oversimplify somewhat, you just take a big pile of loans with a fairly narrow band of note rates and get a WAC (weighted average coupon). Yeild to the investor is weighted average yield of the underlying loans minus the servicing fee and the agency guarantee fee. So if the gross WAC on the pool is 8.375, the servicer takes .25 and Fannie Mae takes .125 (the guarantee fee), the net yield to the investor is 8.00. Obviously, if you start modifying a big bunch of loans to lower their interest rate, you create a problem with yield.
Enter "excess servicing": in this case, the originator/servicer creates a pool that yields 8.50 gross but the coupon to the investor remains 8.00. So Fannie still gets its .125 g-fee, the servicer gets its contractual .25, plus the "excess" .125. The point of taking "excess servicing" is profit, of course, but it can be "spent" on modfications if you have to take a loan out of the pool to modify it.
These super-duper private label securities have such weird cash-flow/coupon structures that it is probably impossible to do anything to the note rates of the underlying loans without blowing the things up. I mean, I look at some of these prospectuses and can't figure out how they're getting the yield even if everything goes right. With these, you just have to do what works out to be a refinance--buy the loan out, which returns principal to the security, then modify it or truly refi it or whatever you wanted to do, then put it on your books or sell it as scratch & dent or whatever. In any case, I'd be shocked to discover that any servicer is making much if any excess on those things--I don't see how there's enough yield for that. But you may accuse me of a fair amount of old-fashioned thinking.
A point to return to whilst I'm back in nostalgia for the old days mode:
As I said above, ten or fifteen or twenty years ago, you had a lot of smaller mortgage servicers out there. Those servicers generally serviced for 1) themselves (their own investment portfolio), 2) Fannie and/or Freddie and/or Ginnie Mae, and 3) one or two private investors. Plus they dealt with maybe three different MIs. If you're a quick study, you can learn all the "different investor rules" in that situation in a couple of days, and then go on your merry servicing way.
Now that servicing has been consolidated into the 800-billion loan gorillas, you have servicers who are dealing with literally hundreds of private investors, all known MIs, plus every known GSE including the Federal Home Loan Bank and Farmer's Home and you name it. And every private investor gets to make its own rules about what you can and can't do with its loans, and what level of review is required for a modification or a foreclosure bid or an expense voucher or what have you. You can waste a whole day trying to straighten out whether this loan requires a full new appraisal or a field review or an AVM or a BPO (broker price opinion) or what-not. Insurance companies, for instance, are big private investors these days, and I personally would rather have to clean the bathroom than have to deal with those wieners on a loss-mit problem. (In my experience, their desire to micromanage is inversely proportional to what they know about how it all works. There are exceptions, but not many.)
So "economy of scale" was necessary in order to make in on the traditional quarter, but "scale" didn't exactly always result in "economy."
If only the rest of the things I want to understand but don't could be explained so clearly. Of course some of the things I do understand have me pretty scared...
"The real bottom-feeder servicers make a fortune on this kind of crap"
I am not going to name names (but hint: "What's in your wallet") but I found it fascinating that a few months after setting up an automatic payment my due date got magically reset to two days before that payment and therefore I was getting late payments each and every month even while I was paying way in excess of minimums.
Strangely enough I am not carrying cards from that issuer anymore. But you can not afford to not pay attention, it doesn't take a lot to have them position you in very uncomfortable ways. Eeek.
Thanks for that piece; it helps me understand some of the tensions going on in the market. Valuing those residual tranches is a real PITA, so it's good to see how servicing can compensate.
It does, however, remind me of the observed low-wala differences in third-party-originated loans in the agency MBS world; that's a whole other can of worms, though.
"Yes, Holden, that's correct--amortization reduces the servicer's income over time."
So why would someone buy servicing rights to an established loan? My own loan is in its last year; there's a balance of something under $8,000 owing. I figure servicing fees over the remaining life of the loan are under $20. Float on P&I is maybe $20-$30. Float on escrow around $80. So total revenue to the servicer is $120 give or take. Cost of establishing and closing out the loan, sending me statements, paying the investor and real estate taxes have to come close to that, if not exceed it. Yet WaMu just sold servicing to Wells Fargo. Why did Wells buy it? Or was the price of the bundle reduced because it contained loans like this?
Tanta, you are the BEST. So much info my head spins. Question for you, what is happening to the mortgages if a servicer goes under? Where do I send the monthly check for my mortgage? If it does not get bought out does the FED step in?
Thanks, Darius. I was sure someone would ask that.
what is happening to the mortgages if a servicer goes under?
That's a nightmare scenario. I used the comparison to the airlines explaining about the oxy masks for a reason.
You can bash the agencies all you want, but they are one bunch of pissy bastards when it comes to servicer approval and periodic "recertification." They have to be. If a big servicer went under, they couldn't take it over themselves--they don't have that kind of capacity. So they would be looking for someone else to assume it ASAP. It has happened in small, isolated cases, but has never (yet) happened on a huge scale in the industry. God help us if it does.
Where do I send the monthly check for my mortgage?
Good question. Someone will eventually find an emergency substitute servicer, but that could take the equivalent of several payments. In the old S&L crisis days, there were people who spent the next six years arguing with the substitute servicer about the payments that were made to someone somewhere in the interim period.
If it does not get bought out does the FED step in?
If it's a regulated depository, then yes, that's what the regulators do when a servicer fails--meaning, they step in and find a substitute. Bernanke can't spend his afternoons collecting mortgage payments any more than Fannie and Freddie can.
"Mortgage Backed Securities do not, necessarily, go up when interest rates go down.
This is because when interest rates go down, mortgage holders refinance. And so the MBS holder gets back his or her capital, before he wants/expects it."
I don't follow you here. MBS' do drive long-term( 30/15 year fixed) mortgage rates. The "spread" between MBS and other bond instruments drive rates. Early pay-offs do affect an investors yield, but not the market itself. Short-term mortgage rates(ARMs) are affected by other forces.
producer | 02.21.07 - 1:12 am | #
Producer
The basis of all interest rates is the 'spread' above the comparable US Treasury bond of the same maturity. In effect, the UST is the so-called 'risk free rate' of investing in fixed income.
Basically the riskier you are on credit, the higher the interest rate in the market.
Other factors determining bond prices besides the credit rating of the issuer are:
liquidity - more liquid bonds should be cheaper (have a lower yield)
callable - many corporate bonds are callable, so if interest rates fall, the issuer may well repay the bond holders early (call the bond)
coupon - I think the higher your coupon rate, the greater your convexity (sensitivity to change in interest rates)-- or its the exact opposite, I'd have to do the math
tax exempt factors
There are other factors, but those are the main ones.
The pricing of MBS is affected by assumptions about what percentage of the underlying mortgages are likely to be refinanced before the expiry of the term of the MBS.
When those mortages are refinanced early (usually due to a sustained fall in interest rates) the bond holders get back their money before they expected.
They then have repayment risk ie the risk that they have to reinvest their money at a lower rate than they first lent it out (ie when they bought the bond).
To price for this, the prices (and hence the yields) of MBS are adjusted to reflect this 'call' that the holder of a securitised mortgage has on his or her lender.
In practise, that means that MBS have a higher yield (lower price) than they would otherwise have.
This repayment risk premium in the market changes over time. If the yield curve is very steep (typically because the Fed has lowered interest rates to fight inflation) you tend to get more refinancings. And so repayment risk and the repayment risk premium are higher.
And lo, wiki does this better than I ever could explain:
Great post. Also, the crunch has begun. FNMA and FHLMC are shoring up the guidelines. They are making the 680 credit the new 620 if you know what I mean. The sweet spot for A Paper is getting smaller and smaller. When rates fall most consumers will be pushed off to the street in ALT-A.
It will be an interesting (and sad for many) year or so...
Tanta, I have a question regarding service jr liens, specifically, the 20 portion of the 80/20s.
How do the servicers get paid when the defaults and subsequent foreclosures by the senior liens result in 100% wipe outs of these 20s? Do they add insult to injury by billing the investors?
I may have to ask you to marry me. Two quick - and hopefully easy - questions. Actually, I need definitions to "cut off" and "closing" dates as they pertain to REMICs and what can/cannot happen during/after those periods.
Ex. Closing date on a REMIC is March 20, 2004. Can notes, specifically non-performing notes, be added into the REMIC AFTER a close of March 20, 2004 - like after March 20, 2005 ?
Moopheus had asked what consumers could do to protect themselves. In my experience there isn't much. If you're going to be teed up for mortgage servicing fraud by your servicer then that's pretty much the ball game. From my own experience, about the best things you can do are:
-\tKeep literally anything and everything on paper having to do with your loan. A-N-Y-thing. Keep it neatly organized too. Manila folders. A nice file box, etc.
-\tChange your monthly payment every month by a few cents. Coordinate it to the month of the payment or something like that. If you pay $750 a month make it $750.09 for Septembers payment, $750.10 for October etc. And make sure that you have the actual checks returned to you. That processing date on the back may become crucial to you at some point. So could the front of the check if its stamped received on a particular date as was the case in my own litigation currently winding its way through the court system.
-\tKeep a log or diary of any activity having to do with your loan. Names, dates, any phone conversations, etc. The time line may prove essential at some point especially three years down the road when youre trying to remember what happened way back when.
Beyond these, there really isnt much else to do until/unless you hear the rotary fecal distributor cranking up against you. Then its time to start looking for a good consumer protection attorney, preferably one with a litigation department, banking/finance, securities and possibly Sarb-Ox experience.
And since I mention consumer protection attorneys, let me address the advice given BY Consumer Attny. Again, from my own experience and that of other MSF victims, a RESPA request, more directly a qualified written request is next to useless in dealing with a servicer who really wants to soak you for every penny and, ultimately, your property. The requests simply are ignored. Unfortunately, they ARE a piece of the overall puzzle and something that should be done as part of building your case if/when you start working on one. It definitely is something to get the ball rolling. Write the request and even send it, making copies for your own file, of course. Just dont expect to have anyone throw the ball back to you. At that point, you should have someone on your team with a 36 Louisville ready to get into the game on your behalf.
I have a question for you, Would you explain this statement from an ASF document.
"...servicers should not make decisions to use or not use loan modifications for the purpose of manipulating the application of delinquency triggers or cumulative loss triggers which control whether excess cash flow may be released to the residual."
Tanta, Doris Dungey, I just found out about you from the Wall Street Journal, and elsewhere in the blogosphere. I have only read this article and am about to attempt the rest. Already I am sorry in knowing that you will not be replying anymore. Rest in peace.
Tanta, thanks for the lesson. This one needs to be printed for future reference.
I guess I'm an ubernerd, because that was one heck of a fascinating piece. Thanks, Tanta.
Tanta,
Lehman had a conference call on the subprime market last week and expressed concern about whether there would be enough servicing capapcity to deal with all the FCs. Is there any history from the 91-93 period on this topic that is worth studying?
Great article
Given this quote by WFC :
"Roughly 72% of the mortgage originations attributed to Wells Fargo Financial in the league tables for the 1H06 were co-issue originations. None of the co-issue loans are originated or underwritten by WFC. They are originated by investment banks with WFC providing servicing for such loans. The investment banks like WFC being the servicer because its strong credit rating provides better pricing when these loans are securitized and sold. None of these co-issue originations ever hit WFCs balance sheet nor can they be put back to WFC. All underwriting risk is with the investment banks."
and the great info provided (once again) by Tanta, it would seem that the statement above is largely PR. Perhaps they dont have the risk of the loan, but Id think that as a servicer, they have plenty of risk due to the foreclosures and potential for massive REO.
Or am I missing something here?
Thanks, all.
You know, Brian, the last time I really worked closely--I mean, drinking out of the same coffee pot every day kind of closely--with mortgage servicing was in that same period in the first 90s RE bust/refi boom. But, well, that's the thing. In those days, you could--as my employer did--have a $60 billion servicing portfolio and still not just survive but make a living. That kind of portfolio is big enough to be efficient--you can afford to have REO specialists on staff--but small enough that you can mostly service your own loans, in your own market area, where you know the loan documents because you drew them up and you know the RE values because you drive past the collateral every day on the way to work.
These days a $60 billion servicing portfolio is a joke, everyone of that size has been assimilated into the Wells/CFC/GMAC/etc. Borg, and the whole environment is different. Sure, you ought to be able to afford the specialized staff for loss mit, BK processing, REO management, etc. But your collateral is all over the U.S., you remit to hundreds of different investors with hundreds of different rules and preferences for dealing with delinquency, and your loan files are totally uneven and occasionally full of dubious docs and missing the really relevant ones. At some point, the drive to consolidate and build up a "national franchise" meant the utter demise of some of the key ingredients of efficiency. Talk about getting what you thought you wanted and then finding out you aren't going to enjoy it.
You bet some servicers laid off the default specialists during the boom. Hell, we've all been talking about how the "rolling loan" phenomenon kept the originators and new-loan-boarders busy during the boom, while the default servicing group had some time on their hands. So they got pared down, and now they have to get beefed up, and frankly good luck with that. People like me either got other jobs or just aren't interested in going back to the misery of foreclosing on people for the pay that's being offered right now. It will have to go up, and it will go up eventually. But then someone is going to have some explaining to do about the EPS. You know.
I would love to see this "correction" result in some serious de-consolidation and return to regionalized servicing, but I'm not holding my breath on that.
Great post!!!
I would just like to add that some servicers seem to try to improve profitability by fixing up their low-balance loans a bit. I have had quite a friends people pop up all of a sudden with misapplied payments once their loan balance drops below $80,000 - $100,000.
That .25% gets smaller and smaller compared to the fixed costs of servicing a loan as the loan balance gets smaller. I genuinely believe that some of the worst of these outfits try to "motivate" refis or prepays on low balance mortgages.
Super maps at The Big Picture:
The Big Picture
Geoff, that statement is true in the sense that WF doesn't hold the note on those loans, didn't make the reps and warranties, and can't be made to eat the EPDs and fraud cases and so on.
To the extent that the statment skates around the risks a servicer might still bear, sure, it's spin.
That said, though, Wells Fargo--and they're not a big fave of mine, you know, I'm just doing them justice here--isn't just a belt-and-suspenders kind of bank. It's a belt-and-suspenders-and-duct-tape-and-staples-and-a-whole-box-of-Light-Days-Oval-Pads kind of bank. (Hope that grossed out you male persons. Did you know, btw, that the one place in the mortgage biz you're most likely to encounter female execs is servicing? As usual, men get to wheel & deal and we get to post the checks every month.) Anyway, Wells is certainly the best possible candidate I can think of to take what risks are there. I'm not so sure I'd say that so emphatically about CFC or GMAC or WAMU or NCC or some of the other big servicers. "Sloppy" is forgivable in a boom on the origination side but is just a killer on the servicing side.
Thanks for the lesson. The mortgage system is more complex than I realized. This complexity could also be the real achilles heal of the system - with so many involved parties who's chief aim is to carve out a small haircut, while not being on the hook, even a modest rise in bk's from here could cause the system to temporarily seize up under dispute uncertainty. That's what caused the mini-meltdown around LTCM, etc. It wasn't that anybody thought the economy was going to crash, it was growing aversion to uncertain counterparty risk that almost caused the system to seize up. And that was a drop in the bucket compared to the mortgage business. Even if they have little investment risk, it seems to me a pretty good chunk of commercial and investment bank earnings come from underwriting, servicing and insuring cdos and mbs. Where they probably have considerable balance sheet risk from lending to hedge funds that have used cdos, etc as leveraged investments. Maybe there's still hope I'll be able to reasonably afford a Manhattan co-op bigger than my dorm room one day?
Tanta, they don't have a maxi tucked in the glove compartment, the purse, and a couple of desk drawers? Darn, I thought they were good.
Thanks for taking the time to share this information with us, Tanta. It's definitely a common nerd trait to want to know how everything works.
As you undoubtedly already knew, you rock!
-E
Tanta, thanks for the great post.
What happens if different servicers service 1st and 2nd mortgages? I guess it's a mess. It was already mentioned that 2nd holder is almost never interested in approving a short sale.
nuclear waste buyers ... profit on distressed-loan servicing
Sorry, I didn't get this one.
Is there anything a consumer with a loan can do to protect themselves against servicer tricks like delayed posting of payments to collect more fees?
with so many involved parties who's chief aim is to carve out a small haircut, while not being on the hook, even a modest rise in bk's from here could cause the system to temporarily seize up under dispute uncertainty
Turbo, you can copy down that sentence and embroider it on a little sign for your desk, it is so true. I have always had the same problem with securitizations. My thing is this: there is reasonable money to be made in lending people money to buy houses. I refuse to believe that there is, really and sustainably, enough money in it for the originators and the servicers and the insurers and the bond underwriters and a hundred different tranche buyers and swap dealers and my pet kitty to take a piece of the interest. The short reason for why we have a subprime/Alt boom is not that we have so many consumers on whom we must--altruistic souls that we are here on Wall Street, gag me--take such risks. It's because it's the only way to generate enough spiff for the entire ridiculous food chain. When that delusion stops, Mr. Party is very, very over.
StillLearning, "nuclear waste" is the industry's charming term for loans 90+ days past due and REO. NW dealers are outfits that specialize in servicing defaulted loans. A lot of prime lenders, especially small banks, will sell their NW servicing off to the NW dealer/servicers, precisely because they don't have the specialized staff to deal with them profitably. They're all just puking right now because the NW dealers have sniffed the wind and are not going to take that junk off someone's hands for cheap.
One of the things a second-mortgage servicer can do, if it has the capacity, is buy the first mortgage out from the current investor/servicer, so that it gets to foreclose and its principal doesn't get frittered away completely in expenses. But, basically, most of those second lenders are just screwed right now, which in my view will teach them to try to compete with big-ass mortgage insurers in a game they thought would never end.
Moopheus, sign up for ACH/direct payment. It is way harder for a servicer to scam that than it is to "misplace" physical checks.
Thanks Alice for your usual great job, lots of info in a good read. But now I need another break, you wore me out - again.
Tanta, so you were talking about buying/selling NW servicing, not the NW itself, correct? In your earlier comment, did C-BASS as well bid just for servicing only?
Thanks again.
I believe that C-BASS usually buys both. That's a whole other day's post--the extent to which some loan sales are "ervicing retained," some are "servicing released," some sales are of servicing rights only, etc.
Moopheus, re Tanta's direct deposit advice...
A rather paranoid person taught me a minor technique that turned out to be very useful. Basically, always make sure person on each side of a money exchange is different. In this specific case, if your bank is part of the same group as your servicer, get another bank account at a different bank, and have your direct payments come from THAT bank. It came in handy for me about 15 years ago as when the service claimed I didn't pay, I sicced my bank on them. Bank on Bank is mutual weight class.
Tanta wrote: "People like me either got other jobs or just aren't interested in going back to the misery of foreclosing on people for the pay that's being offered right now. It will have to go up, and it will go up eventually."
I wonder if these kinds of jobs could be outsourced to India. One of my college friends operates a business that buys defaulted loans from American banks for pennies on the dollar and then uses Indian call centers to recover the money. They make a good living out of this.
Just imagine then. The money came (indirectly to be sure) from China and the foreclosures processed from India. There definitely is a lesson in this somewhere:-)
Thanks, Tanta! Awesome post.
I seek clarification. The basic economics of servicing compensation is that the servicer gets what is called a servicing fee on each loan equal to a slice of the interest paid.
Is it truly a slice of the interest paid? So, in other words, as MaxedOutMama said, the servicer gets less each month as the loan amortizes?
NovaStar whoops! Stock is trading down almost 5 in the aftermarket and dropping like a stone.
I should clarify: to my knowlege, C-BASS buys seasoned subprime loans. You can guarantee that a certain percentage of those will become nuclear waste in the future--it is in the nature of subprime loans to do that at a higher rate than prime loans. But the loans aren't NW yet.
That's not the same as an NW dealer who offers to buy the stuff after the worst has happened. So the pricing structure is completely different in that case, and you do see the "pennies on the dollar" bids there.
could I spell it this simple :
before, servicers did not exist, banks were both servicers and investors, the creation of servicing as increased inequality since the cost of servicing are now priced at their marginal cost for each loan, while in the past, the money collected on huge loan was financing the servicing costs of small loans
Great piece. Thank you.
I would add 'negative convexity' is easy.
Bonds go down in price when interest rates go up. The degree to which they do so is measured by 'Convexity' (strictly speaking: the partial derivative of the bond price with respect to the change in interest rates, is normally less than zero).
When interest rates go down, bond prices go up (for the same reason).
Mortgage Backed Securities do not, necessarily, go up when interest rates go down.
This is because when interest rates go down, mortgage holders refinance. And so the MBS holder gets back his or her capital, before he wants/expects it.
Hence negative convexity. An asymmetric response to interest rates.
Analytically, the holder of an MBS has granted the borrower a call option which they can exercise if the MBS starts to rise in value. That is how one normally models these things (can someone confirm this?).
To fight this, investment banks created Collateralized Debt Obligations (CDOs) where the repayment is broken off into 'tranches' of mortgages.
The top tranche is essentially triple A or near enough, typically. The borrowers are very unlikely to default, and to repay-- the tranche is usually protected against early repayment in some way (ie another tranche must be fully repaid, before the top tranche can be repaid).
The bottom tranche (there are normally several, packaged and sold by the investment banks to different investors with different risk-return requirements) is normally called 'the toxic waste'.
In a tough market, the bank has trouble moving that one, the toxic waste. It may have to take it on its own balance sheet. Although it will be 'marked to market' the reality is, if the market is illiquid, there is no market, and it cannot be sold or turned into cash at any price.
In today's wild and crazy markets, hedge funds have been borrowing money from banks to take on CDO tranches-- they are a key part of the market liquidity.
So you have levered holders of CDOs. If something goes wrong, the market could be flooded with low quality MBS/CDO, as the hedge funds (also 'marked to market') will be forced to sell, and effectively the new issue market for MBS will be shut down.
At which point, only banks that keep mortgages on their balance sheet will be lending.
And we will be back to a world of 20% cash down, first mortgages only. The remaining banks will only lend as first mortagors to prime residential real estate, because they will not be able to shift the mortgages off balance sheet and so free up reserves for more lending. This is called a 'credit crunch'.
The housing market will, accordingly, freeze up for some time.
That is the danger.
Yes, Holden, that's correct--amortization reduces the servicer's income over time. You make your big money in the first two years or so of the loan--depending on how your operation works and your expense load--and then you just put up with the loan for the rest of its lifetime. One reason that a lot of originators got into selling their servicing rights to start with was because they couldn't manage such tiny margins when the loans weren't refinancing often enough (while increasing the balance) or turning over because of home-move-ups.
Analytically, the holder of an MBS has granted the borrower a call option which they can exercise if the MBS starts to rise in value. That is how one normally models these things (can someone confirm this?).
Yes, that's how one models it. Google "option adjusted spread" and you'll get more than you ever wanted to know about MBS pricing models.
Absolutely brilliant.
Did you know, btw, that the one place in the mortgage biz you're most likely to encounter female execs is servicing? As usual, men get to wheel & deal and we get to post the checks every month.)
That explains a lot.
My sis graduated from a small but very fine Midwestern liberal arts college in the middle of 70s stagflation - she couldn't buy a job.
In the end she went back to community college to learn how to type & file just to feed herself. Sent out resumes galore & still nothing.
Then one day she got a call from one of those mid-sized regional banks you described asking her to come in for an interview... It's HQ was in St Paul & had branches & accounts in the rather large Latino neighborhood just south of the city.
They had noticed that as part of her 'liberal arts' education she had lived for six months in San Juan PR & for a year in Central America (Costa Rica & El Salvador). She was fully bi-lingual (and not just 'classical' Spanish either, she had slummed).
They wanted her to 'clerk' in the servicing dept & 'support' their efforts in the Latino community... Within six months she had moved up to the front lines... NPL, FCs, REO.
What an education.
Later she went on to law school, went to work as a prosecutor for the DOJ (approx 15 years & all convictions, ugly white collar tax evasion & general corruption... lotsa of them bilingual trials due to the mix of 'clients' often in places like San Juan & Miami)... She is now a professor of law.
Point is she got her start in 'servicing'... If you know of youngsters who are having trouble finding themselves after four years in the clouds... this could be the place. Its pregnant with possibility.
Tanta,
Is it the servicer who also physically keeps all the original paperwork?
Also now I understand why there is so little prosecution for mortgage fraud and deficiency judgments pursued . Because servicers are not interested and/or have the skills/staff to handle. Basically they are the ones who make important decisions but they are not really motivated.
The servicer generally keeps "the servicing file," which has things in it like the application, the verifications of income and assets, the appraisal, and the original closing documents except the note.
The original note is kept by the investor or a third party known as a "document custodian" who has custody of the note (and sometimes a few other critical original documents) on behalf of the investor.
Some servicers are putting the files on CD-ROM so that the person in India you talk to about the problem with your loan can, in theory, look at the documents (the originals of which are probably in Idaho).
The biggest reason that fraud isn't found is because loan sales (the asset or the servicing or both) are so big, and so frequent, and margins are so small, that only a sampling of loan files are actually looked at in detail. The rest of it is putting values on a spreadsheet and running it through some fancy model. Obviously, the "repurchase war" going on is a symptom of that approach.
Absolutely amazing post. This is why I troll the blogosphere for these pearls of real knowledge.
With so many people passing, shedding and spreading so much responsibility it seems not too difficult to imagine how even a minor hiccup could make everything go horribly wrong.
where the people "taking" the rik are not also managing it I simply cannot imagine that there would be an enourmous disconnect.
Further, given the various service providers who may have differing interests, I could also see where the signals to those investors could not become delayed or distorted.
further
Wow, Tanta, you couldn't get this good of an education at an Ivy League school!
It occurs to me that the wildly inflated prices (10+x DTI), maxed LTVs (100%) and proliferation of I/Os should have really puffed up servicer's cuts. Even if everyone didn't default, a return to historic norms would have to hurt.
Tanta, you are great!
Another variable: Mortgage Insurer. How does it interact with a servicer?
Again, thanks a lot.
Tanta.great post. Do I interpret this correctly that the servicer can usually approve cost effective mitigation? If not the process could be messy for a loan that has been securitized.
Many thanks Tanta for the great post - your grasp of the subject matter is outstanding.
Thanks Tanta. You're awesome.
Nicely done, Tanta.
I took lots of notes, but still need to know -- will this be on the mid-term?
Fascinating.
"C-BASS buys seasoned subprime loans."
They buy unseasoned loans as well, and, as we all know now, they are a originator.
"Mortgage Backed Securities do not, necessarily, go up when interest rates go down.
This is because when interest rates go down, mortgage holders refinance. And so the MBS holder gets back his or her capital, before he wants/expects it."
I don't follow you here. MBS' do drive long-term( 30/15 year fixed) mortgage rates. The "spread" between MBS and other bond instruments drive rates. Early pay-offs do affect an investors yield, but not the market itself. Short-term mortgage rates(ARMs) are affected by other forces.
Moopheus,
If you are ever in a dispute with a servicer you should get the ball rolling by sending them a RESPA request. Google 'respa request' and you'll find lots of examples.
wow:
"We all have a tendency to say stupid things. About seven months ago, some members of the economic fraternity created a lot of noise with widely reported warnings that we were recession bound. Especially outspoken in this respect was New York University's professor of economics, Noriel Roubini."
"In retrospect, those recession forecasts now shape up as pretty outlandish, if not outright dumb."
"Mr. Roubini, the skipper of New York-based Roubini Global Economics, also blundered badly in his market forecast, predicting the onset of sharply falling stock prices in September, with the S&P 500 between then and June of 2007 plummeting some 1.5% to 2%. Following his forecast, about 10 market averages, including the Dow, charged to new all-time highs over the next six months. So (Roubini) flunked on both the economy and the market."
"How does Mr. Roubini explain away his ATROCIOUS forecasting and is he still sticking with his prediction of a recession? Not surprisingly, he doesn't want to talk about that, refusing to respond to repeated calls seeking comment."
read it all here: Recession Forecasters Spoke Too Soon - February 21, 2007 - The New York Sun
Do I interpret this correctly that the servicer can usually approve cost effective mitigation? If not the process could be messy for a loan that has been securitized.
What the servicer can do is very much a question of who the investor is and how the loan is held by that investor. For instance, if the loan is in a REMIC, it cannot be modified at all; a troubled loan in that kind of security has to be bought out of it in order to be modified. Fannie and Freddie will generally let you buy a loan out of an MBS, modify it, and then sell it back to them, but then they're really into loss mit options. Private investors are generally less inclined--or less able, given their security structures--to do that. In any case, a servicer always needs the permission of the investor to modify a loan. With the GSEs, you can have what amounts to "standing permission" to do a range of things to a range of loans, but it's still the investor's call and they can give you "guidance" if you are modifying too many (or too few) loans. Legally, a modification agreement is worthless without the current noteholder's signature on it, so if the current noteholder didn't give the servicer a POA to do mods (which can happen), you literally have to run it by the noteholder.
"Informal" forbearance arrangements of up to three months are generally at the servicer's call--since the servicer will be remitting the interest to the investor, it's the servicer's butt if it doesn't work.
You always have to involve the MI in any of these decisions on an insured loan if you want to assure that you keep the coverage. They're a lot like the agencies: if you're one of their preferred servicers, they'll give you a lot of leeway, but they never let go completely of the leash. (Which is smart.)
What it comes down to in so many cases is the cash-flow of the security. I didn't talk about "excess servicing," but perhaps I should. Perhaps I should do so in the next comment to keep Halo from truncating it.
One of the joys of the good old agency pass-through MBS (and I'm not talking about those extremely complex structured RMBS and CDOs and stuff here) is the comparative ease of matching security coupon to loans. To oversimplify somewhat, you just take a big pile of loans with a fairly narrow band of note rates and get a WAC (weighted average coupon). Yeild to the investor is weighted average yield of the underlying loans minus the servicing fee and the agency guarantee fee. So if the gross WAC on the pool is 8.375, the servicer takes .25 and Fannie Mae takes .125 (the guarantee fee), the net yield to the investor is 8.00. Obviously, if you start modifying a big bunch of loans to lower their interest rate, you create a problem with yield.
Enter "excess servicing": in this case, the originator/servicer creates a pool that yields 8.50 gross but the coupon to the investor remains 8.00. So Fannie still gets its .125 g-fee, the servicer gets its contractual .25, plus the "excess" .125. The point of taking "excess servicing" is profit, of course, but it can be "spent" on modfications if you have to take a loan out of the pool to modify it.
These super-duper private label securities have such weird cash-flow/coupon structures that it is probably impossible to do anything to the note rates of the underlying loans without blowing the things up. I mean, I look at some of these prospectuses and can't figure out how they're getting the yield even if everything goes right. With these, you just have to do what works out to be a refinance--buy the loan out, which returns principal to the security, then modify it or truly refi it or whatever you wanted to do, then put it on your books or sell it as scratch & dent or whatever. In any case, I'd be shocked to discover that any servicer is making much if any excess on those things--I don't see how there's enough yield for that. But you may accuse me of a fair amount of old-fashioned thinking.
A point to return to whilst I'm back in nostalgia for the old days mode:
As I said above, ten or fifteen or twenty years ago, you had a lot of smaller mortgage servicers out there. Those servicers generally serviced for 1) themselves (their own investment portfolio), 2) Fannie and/or Freddie and/or Ginnie Mae, and 3) one or two private investors. Plus they dealt with maybe three different MIs. If you're a quick study, you can learn all the "different investor rules" in that situation in a couple of days, and then go on your merry servicing way.
Now that servicing has been consolidated into the 800-billion loan gorillas, you have servicers who are dealing with literally hundreds of private investors, all known MIs, plus every known GSE including the Federal Home Loan Bank and Farmer's Home and you name it. And every private investor gets to make its own rules about what you can and can't do with its loans, and what level of review is required for a modification or a foreclosure bid or an expense voucher or what have you. You can waste a whole day trying to straighten out whether this loan requires a full new appraisal or a field review or an AVM or a BPO (broker price opinion) or what-not. Insurance companies, for instance, are big private investors these days, and I personally would rather have to clean the bathroom than have to deal with those wieners on a loss-mit problem. (In my experience, their desire to micromanage is inversely proportional to what they know about how it all works. There are exceptions, but not many.)
So "economy of scale" was necessary in order to make in on the traditional quarter, but "scale" didn't exactly always result in "economy."
Thank you.
If only the rest of the things I want to understand but don't could be explained so clearly. Of course some of the things I do understand have me pretty scared...
"The real bottom-feeder servicers make a fortune on this kind of crap"
I am not going to name names (but hint: "What's in your wallet") but I found it fascinating that a few months after setting up an automatic payment my due date got magically reset to two days before that payment and therefore I was getting late payments each and every month even while I was paying way in excess of minimums.
Strangely enough I am not carrying cards from that issuer anymore. But you can not afford to not pay attention, it doesn't take a lot to have them position you in very uncomfortable ways. Eeek.
Thanks for that piece; it helps me understand some of the tensions going on in the market. Valuing those residual tranches is a real PITA, so it's good to see how servicing can compensate.
It does, however, remind me of the observed low-wala differences in third-party-originated loans in the agency MBS world; that's a whole other can of worms, though.
"Yes, Holden, that's correct--amortization reduces the servicer's income over time."
So why would someone buy servicing rights to an established loan? My own loan is in its last year; there's a balance of something under $8,000 owing. I figure servicing fees over the remaining life of the loan are under $20. Float on P&I is maybe $20-$30. Float on escrow around $80. So total revenue to the servicer is $120 give or take. Cost of establishing and closing out the loan, sending me statements, paying the investor and real estate taxes have to come close to that, if not exceed it. Yet WaMu just sold servicing to Wells Fargo. Why did Wells buy it? Or was the price of the bundle reduced because it contained loans like this?
jim, you just discovered the meaning of the phrase "making it up on volume."
Yes, WAM (weighted average maturity) is as much a factor in pricing as WAC (weighted average coupon).
Tanta, you are the BEST. So much info my head spins. Question for you, what is happening to the mortgages if a servicer goes under? Where do I send the monthly check for my mortgage? If it does not get bought out does the FED step in?
Thanks
Darius
Thanks, Darius. I was sure someone would ask that.
what is happening to the mortgages if a servicer goes under?
That's a nightmare scenario. I used the comparison to the airlines explaining about the oxy masks for a reason.
You can bash the agencies all you want, but they are one bunch of pissy bastards when it comes to servicer approval and periodic "recertification." They have to be. If a big servicer went under, they couldn't take it over themselves--they don't have that kind of capacity. So they would be looking for someone else to assume it ASAP. It has happened in small, isolated cases, but has never (yet) happened on a huge scale in the industry. God help us if it does.
Where do I send the monthly check for my mortgage?
Good question. Someone will eventually find an emergency substitute servicer, but that could take the equivalent of several payments. In the old S&L crisis days, there were people who spent the next six years arguing with the substitute servicer about the payments that were made to someone somewhere in the interim period.
If it does not get bought out does the FED step in?
If it's a regulated depository, then yes, that's what the regulators do when a servicer fails--meaning, they step in and find a substitute. Bernanke can't spend his afternoons collecting mortgage payments any more than Fannie and Freddie can.
Thank you very much for the answer. It sounds like a nightmare scenerio for all involved.
LOL Bernanke can't spend his afternoons collecting mortgage payments any more than Fannie and Freddie can.
"Mortgage Backed Securities do not, necessarily, go up when interest rates go down.
This is because when interest rates go down, mortgage holders refinance. And so the MBS holder gets back his or her capital, before he wants/expects it."
I don't follow you here. MBS' do drive long-term( 30/15 year fixed) mortgage rates. The "spread" between MBS and other bond instruments drive rates. Early pay-offs do affect an investors yield, but not the market itself. Short-term mortgage rates(ARMs) are affected by other forces.
producer | 02.21.07 - 1:12 am | #
Producer
The basis of all interest rates is the 'spread' above the comparable US Treasury bond of the same maturity. In effect, the UST is the so-called 'risk free rate' of investing in fixed income.
Basically the riskier you are on credit, the higher the interest rate in the market.
Other factors determining bond prices besides the credit rating of the issuer are:
There are other factors, but those are the main ones.
The pricing of MBS is affected by assumptions about what percentage of the underlying mortgages are likely to be refinanced before the expiry of the term of the MBS.
When those mortages are refinanced early (usually due to a sustained fall in interest rates) the bond holders get back their money before they expected.
They then have repayment risk ie the risk that they have to reinvest their money at a lower rate than they first lent it out (ie when they bought the bond).
To price for this, the prices (and hence the yields) of MBS are adjusted to reflect this 'call' that the holder of a securitised mortgage has on his or her lender.
In practise, that means that MBS have a higher yield (lower price) than they would otherwise have.
This repayment risk premium in the market changes over time. If the yield curve is very steep (typically because the Fed has lowered interest rates to fight inflation) you tend to get more refinancings. And so repayment risk and the repayment risk premium are higher.
And lo, wiki does this better than I ever could explain:
Mortgage-backed security - Wikipedia, the free encyclopedia
You are right to say that can have an effect on mortgage rates, although in practice the main determinant of mortgage rates is Fed policy.
ARMs I agree have completely different pricing models.
Tanta,
Great post. Also, the crunch has begun. FNMA and FHLMC are shoring up the guidelines. They are making the 680 credit the new 620 if you know what I mean. The sweet spot for A Paper is getting smaller and smaller. When rates fall most consumers will be pushed off to the street in ALT-A.
It will be an interesting (and sad for many) year or so...
Tony
Tanta, I have a question regarding service jr liens, specifically, the 20 portion of the 80/20s.
How do the servicers get paid when the defaults and subsequent foreclosures by the senior liens result in 100% wipe outs of these 20s? Do they add insult to injury by billing the investors?
Ramsey
Tanta,
I may have to ask you to marry me.
Two quick - and hopefully easy - questions. Actually, I need definitions to "cut off" and "closing" dates as they pertain to REMICs and what can/cannot happen during/after those periods.
Ex. Closing date on a REMIC is March 20, 2004. Can notes, specifically non-performing notes, be added into the REMIC AFTER a close of March 20, 2004 - like after March 20, 2005 ?
Moopheus had asked what consumers could do to protect themselves. In my experience there isn't much. If you're going to be teed up for mortgage servicing fraud by your servicer then that's pretty much the ball game. From my own experience, about the best things you can do are:
-\tKeep literally anything and everything on paper having to do with your loan. A-N-Y-thing. Keep it neatly organized too. Manila folders. A nice file box, etc.
-\tChange your monthly payment every month by a few cents. Coordinate it to the month of the payment or something like that. If you pay $750 a month make it $750.09 for Septembers payment, $750.10 for October etc. And make sure that you have the actual checks returned to you. That processing date on the back may become crucial to you at some point. So could the front of the check if its stamped received on a particular date as was the case in my own litigation currently winding its way through the court system.
-\tKeep a log or diary of any activity having to do with your loan. Names, dates, any phone conversations, etc. The time line may prove essential at some point especially three years down the road when youre trying to remember what happened way back when.
Beyond these, there really isnt much else to do until/unless you hear the rotary fecal distributor cranking up against you. Then its time to start looking for a good consumer protection attorney, preferably one with a litigation department, banking/finance, securities and possibly Sarb-Ox experience.
And since I mention consumer protection attorneys, let me address the advice given BY Consumer Attny. Again, from my own experience and that of other MSF victims, a RESPA request, more directly a qualified written request is next to useless in dealing with a servicer who really wants to soak you for every penny and, ultimately, your property. The requests simply are ignored. Unfortunately, they ARE a piece of the overall puzzle and something that should be done as part of building your case if/when you start working on one. It definitely is something to get the ball rolling. Write the request and even send it, making copies for your own file, of course. Just dont expect to have anyone throw the ball back to you. At that point, you should have someone on your team with a 36 Louisville ready to get into the game on your behalf.
Great article. I'm using this at work to explain why not to get into the mortgage servicing market.
I have a question for you, Would you explain this statement from an ASF document.
"...servicers should not make decisions to use or not use loan modifications for the purpose of manipulating the application of delinquency triggers or cumulative loss triggers which control whether excess cash flow may be released to the residual."
Tanta, Doris Dungey, I just found out about you from the Wall Street Journal, and elsewhere in the blogosphere. I have only read this article and am about to attempt the rest. Already I am sorry in knowing that you will not be replying anymore. Rest in peace.