GSEs Outsource Loss Mitigation Duties to Special Servicers

by devteam October 26th, 2010 | Share

Another “ahead of the curve” article written by Al Yoon at Reuters…</p

Fed up Fannie and Freddie eye new workout firms</p

NEW YORK, Oct 25 (Reuters) – U.S. mortgage finance giants Fannie Mae and Freddie Mac are looking to more aggressively move loan workout duties to specialist firms as their frustrations with the big banks deepen, sources said. </p

Widespread criticism — and federal and state investigations — of big banks’ use of inaccurate paperwork when foreclosing and their reluctance to ease payments for borrowers has created an opportunity for smaller companies to take on more of the lucrative business. Ten firms handled 80 percent of Fannie Mae’s loans, of which 27 percent were in the hands of Bank of America, as of June.</p

The trend may result in big banks losing revenue as the now four-year mortgage crisis wears on, but it may help homeowners and save taxpayers money. Homeowners may end up with better care as they wind their way through the foreclosure process and taxpayers — who support Fannie Mae and Freddie Mac — may end up shouldering fewer losses from bad mortgages. </p

Banks including Wells Fargo & Co and Bank of America Corp collect payments on millions of mortgages and work out bad loans. The service of collecting monthly payments is typically paid out of the interest rate charged on the loans guaranteed by Fannie Mae and Freddie Mac. </p

“There’s a ton of servicing transfers going on. Some very big ones,” said Sue Allon, chief executive officer of Allonhill, a Denver, Colorado-based mortgage risk management firm that has been involved in some of those deals. </p

Fannie Mae this month reassigned servicing on some 200,000 loans, placing a large chunk with Nationstar Mortgage, a unit of Fortress Investment Group, two sources said. It is a relatively small portion of Fannie Mae’s portfolio, but it may also be the tip of the iceberg. </p

A Nationstar spokesman did not respond to requests for comment. A spokeswoman for Fannie Mae declined to comment on servicing transfers and the original servicer of the loans was not disclosed. </p

Freddie Mac, which has hired Ocwen Financial Corp in the past, is considering greater use of so-called special servicers that were set up to deal with delinquent borrowers, versus the high-volume business of simply collecting and distributing payments, Anthony Renzi, executive vice president of single-family portfolio management, said through a Freddie Mac spokesman. </p

In addition to Nationstar, other firms “making a big play” to take on work from Fannie Mae and Freddie Mac, include Ocwen and Wilshire Credit Corp., a former Merrill Lynch & Co. servicer sold to IBM by Bank of America in March, said Steve Horne, president of Wingspan Portfolio Advisors, a Carrollton, Texas-based servicer.</p


Investors have also complained of variations of servicers’ policies that can make significant differences to a loan’s market value or proceeds when the bank repossesses the home. Nearly 3 million homes have gone into foreclosure since January 2007. The volume has put servicers under pressure to process the foreclosures at a rapid rate and led to allegations that “robo-signers” were certifying documents they had not processed.</p

Beyond bad paperwork, many servicers have failed to take enough steps that could help limit losses for whoever owns the mortgages, such as modifying loan terms. </p

“What it’s bringing attention to is, these mega-servicers are so inundated, that they can’t get to the ones that need attention,” said John Beggins, chief executive officer of Specialized Loan Servicing, in Littleton, Colorado, which is hired by investors to improve the value of defaulted loans, and has taken on some Fannie Mae and Freddie Mac business. </p

“How many people are slipping into foreclosure that could have been modified?” said Beggins, adding that “I do hear a lot of activity out there.” </p

This failure has been a major thorn in the side of Fannie Mae and Freddie Mac, which are trying to minimize losses on the more than $5 trillion of loans and mortgage bonds that they have guaranteed and invested in.</p

Fannie Mae told servicers in August that it would seek damages if they took too long to foreclose on homes, or didn’t take proper action that would help cut losses. The company also outlined allowable timeframes for foreclosures in some states. </p

“Fannie can and will remove servicing because, at this point, the servicers are costing them money,” said Paul Norris, head of structured bonds at Burlington, Vermont-based Dwight Asset Management, and a former Fannie Mae portfolio manager. </p

It makes sense for Fannie Mae and Freddie Mac to spread around their business to limit their risk, industry experts said.</p

But the big servicers, who are also the largest home mortgage originators, will most likely retain most of their market share, however, said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia. </p


Last May we said special servicers were much better suited to handle the loss mitigation and loan modification process…</p

From “Special Servicers More Motivated to Mitigate Housing’s Losses“, written by Tim Rood on the Voice of Housing blog:</p

The traditional compensation model for servicers is based on a flat percentage of a loans outstanding in the portfolio. On conventional loans, servicers are generally paid between 0.25 and 375% of total unpaid loan principle in their portfolio. Every incremental dollar spent counseling borrowers and mitigating the losses of the end investor (not their own losses) is cutting into the servicers margin. While it’s true that there are economic incentives in the MHA program intended to cover the added expense of fulfilling HAMP requirements, the chips don’t stack up from a business model perspective, otherwise you would see servicers treating HAMP participation as a profit center and doing more – not less – loss mitigation. Instead loss mitigation activities are performed only to the point of meeting their minimum contractual obligation to the investor and at the least incremental expense.

There is much more incentive for a specialty servicer to make the right loss mitigation decision.

“Specialty servicers”, who are in the business of deciding on whether it’s more cost effective to bring a borrower current or liquidate the collateral at the smallest possible loss, are generally compensated in a way tied to how efficiently they control losses. There is economic motivation for specialty servicers to make the right decision for both the borrower and the bank.

While it was a wonderful thing for hundreds of thousands of homeowners and their surrounding communities, the sun is setting on MHA and HAMP. We’re hearing that servicers and borrowers should not expect to see future announcements from the Obama Administration on a potential “son of HAMP” or “son of HAFA” program.

The bottom line is…

We either need to modify/amend servicing contracts to properly incentivize servicers to perform an effective level of loss mitigation or we need replace them with the abundant supply of specialty servicers who are clamoring for a shot at the business.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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