September 2016 - Women in Housing

TheMReport — News and strategies for the evolving mortgage marketplace.

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48 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SERVICING THE LATEST How the New Servicing Rules Affect Community Lenders GAO reviewed impact of CFPB's regulations on small banks and credit unions T he Dodd-Frank Act, the Consumer Financial Pro- tection Bureau (CFPB) and other post-crisis Wall Street reform actions were aimed at preventing larger banks from engaging in risky financial practices. Community institutions and credit unions have long com - plained that these reforms have adversely affected their businesses. The Government Accountability Office (GAO) was asked to review the effect of the CFPB's servic - ing rules enacted in January 2014 on U.S. banks and credit unions, particularly community lend- ers, which held about $3.1 billion in mortgage servicing rights (MSRs) on their balance sheets as of September 30, 2015. The new rules related to mortgage servicing and regulatory capital to protect consumers and strengthen the financial services industry. The GAO determined that community lenders (including community banks and credit unions) remained active in servic - ing residential mortgage loans in the era of the CFPB's new servic- ing rules. Though community institutions service a small per- centage of residential mortgages (13 percent) when compared with the larger banks, which collectively service about half of the country's residential mortgages, the share of residential mortgages serviced by community lenders doubled in the years immediately after the crisis (2008 to 2015). The GAO's report found that the new servicing rules seemed unlikely to affect the decisions of most community lenders when it came to retaining or selling MSRs. "Many lenders GAO interviewed said changes in mortgage-related requirements resulted in increased costs, such as hiring staff and up - dating systems," the GAO's report stated. "However, many also stated that servicing mortgages remained important to them for the revenue it can generate and their customer- focused business model." The GAO recommended that the CFPB create a more complete plan to measure the effects of the new servicing rules, including specific metrics, baselines, and analytical methods. The CFPB agreed to complete a plan for con - ducting a retrospective review of the new mortgage servicing rules, and also to refine the scope and focus reviews. "The GAO report confirms our concerns that CFPB's mort - gage servicing rules are impacting credit unions," said Carrie Hunt, EVP of Government Affairs and General Counsel for the National Association of Federal Credit Unions. "Furthermore, the findings underscore the fact that increasing compliance costs have impacted customers' costs and choices. The report notes that several institu - tions no longer offered customers certain products because offering them would necessitate addi- tional regulatory requirements. For this reason, we continue to urge CFPB to provide greater guidance and clarifications on these rules to insure that credit unions can continue to serve their members' mortgage needs." Things are Tough All Over Walter Investment joins group of non-bank servicers that took a hit financially in Q2 C ontinuing an unfortu- nate trend for non-bank mortgage servicers in the second quarter of 2016, Walter Investment Manage - ment Corp. reported a net loss of $232 million for the three-month period ending June 30, 2016, ac- cording to the company's Q2 2016 earnings report. One result of the losses for Walter Investment was a change in leadership. George M. Awad took over as the company's Executive Chairman of the Board and Interim CEO on June 30, the last day of Q2. The company reported that they have hired an industry veteran as permanent CEO who is expected to start sometime during Q 4. Declining interest rates played a major role in the $172 million net loss that Walter Investment reported for Q1, and it was more of the same for the company in Q2. Walter's Q2 net loss included good - will impairment charges of $133.6 million after tax and non-cash charges of $87.2 million after tax, re- sulting from fair value changes due to changes in valuation inputs and other assumptions, according to the company's announcement. The goodwill impairment charges incurred by Walter Investment during Q2 related to servicing and ARM report - ing units within the company's servicing segment—and were primarily the result of elevated discount rates applied to lower re-forecasted cash flows, according to Walter Investment. "While second-quarter perfor - mance showed improvement in some areas as compared to the prior quarter, our results con- tinue to fall short of expectations, driven by both external factors such as the declining interest rate environment, as well as internal operational inefficiencies," Awad said. "We remain resolute on achieving sustainable growth, delivering consistent profitability and maximizing our capital al - location. Our strategy to achieve these goals is founded on three pillars: capital efficiency, process efficiency and an engaged work- force and new leadership." Ditech, the company's servic- ing segment, took a hit because of the goodwill impairment changes; after reporting a pre-tax income of $82.3 million for Q2 2015, Ditech reported a pre-tax loss of $356 million for Q2 2016. Ditech re - mains one of the top 10 servicers in the country when ranked by unpaid principal balance (UPB); Ditech services approximately 2.1 million accounts with a UPB of approximately $248.6 billion as of the end of Q2. Ditech completed MSR sales of $8.5 billion during Q2. Expenses for the Servicing Segment increased from $239.4 million in Q2 2015 way up to $428.4 million, primarily due to $215.4 million in goodwill impair - ment charges during the quarter. The origination segment fared somewhat better than the servic- ing segment, reporting a net in- come of $45.6 million—an increase of $12.7 million over-the-year. Still, revenue for the origination segment declined over-the-year by $18.5 million, down to $110.2 million—primarily due to a $15.2 million decrease in net gains on sales of loans. Ditech is ranked as a top 20 originator in the country, according to UPB. The year 2016 has been as tough for non-bank servicers as 2015 was earnings-wise. Out of the three largest non-bank servicers rated by Moody's (Ocwen Financial, Nationstar Mortgage, Walter Investment), all reported quarterly losses for both Q1 and Q2 this year. Out of the three, only Nationstar turned a profit for the full year of 2015 ($43 million). Both Ocwen and Walter Investment experienced losses of more than $200 million last year.

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