TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1345021
30 | M R EP O RT FEATURE cash flows from the underlying mortgage asset, so any risks to that cash flow—whether it's the borrower paying off the mortgage ahead of time or failing to pay at all—will decrease the value. Right now, both of those risks remain high and will likely stay that way for some time, at least if rates remain low and the chances of borrowers becoming delinquent on their loans are present. Even though foreclosure rates remain low despite the economic fallout from the pandemic—mostly because borrowers facing financial difficulties have been offered forbearance plans—the number of delinquent loans in December was up 79% from one year prior. Borrowers in default mean a reduction in cash flow and the value of the MSR asset. It also means the cost of servicing that asset grows, as it takes extra work to service delinquent loans while staying compliant with servic- ing rules that took place after the 2008 market collapse. These risks are heightened for servicers that borrow money to purchase MSR portfolios, because the lender could make a margin call if cash flows fall. Major eco- nomic events can impact multiple servicers holding MSRs this way, which can lead to a systemwide crash in values. This is one reason why banks reduced the amount of MSRs they owned after the 2008 housing collapse. Meanwhile, there is significant anxiety about the economy and what will happen to the large number of borrowers who will eventually be coming out of forbearance plans. According to the Mortgage Bankers Association, nearly 5.5% of all homeowners were in forbearance plans in early December. While this was a decrease from 8.5% six months earlier, new forbearance requests have been growing. Currently, an estimated 16 million people have claimed unemployment benefits or assistance through the Pandemic Unemployment Assistance fund for self-employed workers. Yet another factor impacting the MSR market has been the level of financial support that's been offered to servicers since the start of the pandemic. While housing agencies have offered help to ser- vicers so they can make advance payments, so far, the federal gov- ernment has held off on providing direct support, as private financ- ing has largely been available to servicers. This could change, of course, if the crisis and its damage to the economy worsens. New Opportunities for Servicers B ecause MSR assets are dif- ficult to value—and even more so today—buying and selling MSRs invariably involves risk. New entrants in the MSR market face other risks, as it takes signifi- cant time to gain approval from the GSEs to service loans in ad- dition to the time spent ensuring the right operations are in place to manage them. Typically, there are several strategies for reducing risk. One is to balance MSR investments by increasing purchase and refinance originations. Another is to sell pieces of the servicing work to subservicers. For the second option, obviously, it helps to partner with a company with experience in MSR and portfolio acquisitions as well the day-to-day management of large servicing. It can also help to find a part- ner that supports your business model and provides options when it comes to deciding whether to hold or sell servicing rights, and perhaps one that could potentially buy MSRs from you when you're ready to sell. The most trusted subservicers are those approved by all the housing agencies and Federal Home Loan Banks and have a history of using technology to streamline the servicing process. Lenders can use these vendors for both servicing and subservic- ing while retaining the option to subservice or sell MSRs on either a bulk or flow basis. The benefit of this strategy is that lenders can reduce operating risk that can arise when dealing with aggregators while realizing greater cash flow. The value of technology when it comes to managing MSRs and keeping costs down cannot be overstated. Whether loans are paid off early or go into default, reducing the cost of servicing loans translates to greater profit- ability. A high-quality subservic- ing partner will typically have a technology platform that offers real-time visibility into loan status and performance through a secure lender portal and be able to lever- age exception-based processing to identify data anomalies during loan boarding and over the life of the loan. These technologies have been shown to reduce servicing error rates by as much as 80% and borrower complaints by 50% or more. A servicer's technology should also extend to borrowers by letting them manage their loans online through any device, includ- ing mobile apps. These tools typi- cally enable borrowers to schedule payments, request loan and tax documents, and receive help from customer service agents. In today's environment, it's important that borrowers have digital control of their loans and are offered com- plete transparency regarding their loan status and conditions. For companies that hold MSRs or are thinking about investing in them, there is a lot to think about over the coming year. The bottom line is that there is likely more volatility in store, in addition to new challenges that we cannot anticipate. For any MSR market participant, it's worth paying attention to the big picture and getting the right help when needed. After all, there will always be market hurdles—as well as rewards for those that over- come them. . BRANDON MCGEE is VP, Mortgage Servicing Rights Transaction Manager for BSI Financial Services. McGee will be responsible for the company's MSR and portfolio acquisitions and overseeing and supporting the day-to-day management of the company's growing servicing portfolio. A 15-year veteran of the mortgage industry, McGee spent 11 years at Fannie Mae, most recently as a Relationship Manager. Before that, he was a Senior Portfolio Manager, where he managed the performance of Fannie Mae's largest subservicer and MSR investors to meet expectations and requirements related to servicing customer portfolios, investor reporting, delivery accuracy, and other servicing activities. Servicers that could afford to hold onto their MSR assets did so, while those that were experiencing liquidity issues and had no other choice but to offload MSRs did so, but only at bargain-bin prices. Even then, there weren't many takers.