It’s been a few weeks since we had the time to write an article due to a packed schedule. We’ve recently visited Colorado, Florida, Indiana, Maryland, North Carolina, Ohio and Texas. The photo to the left is a shot we took at sunset in downtown Orlando, Florida.
Wayne Gretzky: “A good hockey player plays where the puck is. A great hockey player plays were the puck is going to be”.
One of the questions we ask mortgage bankers during our Mortgage Banker Risk Assessment (MBRA) reviews is: What is the key risk to the Company and how does management mitigate that risk? The answer from most owner/operators is the shrinking number of large bank-owned secondary market investors that are actively buying loans, servicing released. With the departure of Bank of America from the correspondent channel and other banks curtailing their loan purchase activities, there is concern mortgage bankers might wake up one day in the near future and only have a few take out investors that will be buy both the loan and the serving asset.
The smarter and strategically thinking owner/operators tell us that a key strategy to mitigate this risk is to obtain FHLMC, FNMA and GNMA approvals and start servicing loans. This is a radical strategic change from the last 15 years when most mortgage bankers sold their loans servicing released. During this period the large bank owned mortgage banks used their deposits to finance the acquisition of servicing rights. Banks loaded up on servicing, sometimes using aggressive assumptions in valuing servicing rights. Because small to mid size mortgage bankers didn’t have access to low cost financing tools like banks, they elected to sell the servicing rather than retaining. The shift to retain servicing is reminiscent of the mortgage banking model before servicing was an on balance sheet asset.
There are various explanations why the large banks may be exiting the correspondent business and not purchasing servicing. Proposed regulations that might limit the amount of servicing banks can maintain on the balance sheet, low return on capital or repurchase risk all might contribute to the curtailment. Regardless of the reasoning, mortgage bankers tell us it is major concern.
Selling loans to the agencies or issuing securities backed by GSE eligible or government insured loans servicing retained is be a viable strategy to mitigate investor counterparty risks. However, all mortgage bankers should not consider servicing a strategy for the future.
Doing business directly with FHLMC, FNMA and GNMA comes with many new challenges and risks. More capital is required to do business with these entities than a typical take out investor and the increasing capital and liquidity are important as the servicing portfolio grows. Written policies, procedures and controls are a requirement to do business with the agencies and more importantly, adhering to the policies, procedures and controls is critical to ensure the relationship continues. All the agencies conduct forensic audits on approved seller/servicers and will uncover any noncompliant areas. Severe noncompliance can result in a termination and/or a seizure of servicing.
Most mortgage bankers today don’t have adequate staff or technology to service loans and must engage a subservicer to perform loan servicing tasks. Subservicers are yet another counterparty that mortgage bankers must manage. Though the subservicer performs the actual servicing functions, a mortgage banker must have thorough quality control procedures to monitor the subservicer and employ an internal manager that can oversee the servicing functions. The mortgage banker is responsible for any poor servicing practices and agency requirement noncompliance.
No one really knows what the industry may look like a few years from now. Regulations, market conditions and industry participants are likely to change and be different than today. A smart owner/operator will prepare for the change by having an arsenal of options to prepare for the future. Having agency approval and servicing loans is one of those options.
Cameron Watts, CMB
C. M. "Corky" Watts, CMB