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8(a) SDB CMMI Level 3 DSS Cleared Facility
Company XYZ – Loan-Level Portfolio
Management PresentationMarch 12, 2015 This document and any attachments to it contain
confidential business information intended solely for the recipients. Recipients are not authorized to forward or
distribute it to any other party.
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Agenda
I. Executive Summary
• Current State₋ Background, Engagement Summary, Project Objectives, Project Approach, Industry
Comparison, Summary Impact Assessment
• Future State₋ Future Vision, Future State Options, Loan-Pool-Securities Aggregation Process
• Conclusion• Recommended Next Steps
II. Appendix
• Supporting Documentation
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Current State: Background
• Company XYZ has embarked on a multi-year effort to transform their Mortgage Backed Securities (MBS) program and associated business process and technology to meet the demands of an increasingly complex environment.
• Company XYZ’s overriding goal is to protect and preserve the utility, relevance, and successful track record of the MBS program. The white paper, ABC, illustrates the major issues impacting the program (e.g); this paper also lays out areas in which Company XYZ will be aggressive about changing its program and infrastructure to meet the evolving needs of the market.
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Current State: Engagement Summary
• The Unissant/Actualize team was contracted to provide a current state analysis of the Company XYZ pool-centric model and what it would take to move towards a model that is based on loan level data.
• Assumptions:
₋ Company XYZ senior leadership has a firm understanding of the policies, procedures, and limitations of the current operating model and does not want a report that re-hashes existing documentation.
₋ Company XYZ senior leadership expects a foundational document that identifies key findings, major areas of impact, and plausible options to continue and enhance the success of the MBS program.
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Current State: Project Objectives
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• Understand the complexity of the changes involved of going from a pool structure to a loan-level structure business model including the identification of policy, business process, and systems gaps.
• Develop current state documentation to support the creation of roadmap that will ultimately include a current state, future state, gap analysis, identification of key data points, program changes and system changes that will be required to move down the path that allows for loan level processing rather than pool level for certain functions including transferring Mortgage Servicing Rights (MSRs).
• Establish the foundation for a future state roadmap.
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Current State: Project Approach
• Work with Company XYZ stakeholders to obtain input and capture concerns and challenges; and review of current process flows; participant roles and responsibilities; and MBS guide
• Consult with various stakeholders to obtain input from each respective program office and insuring agencies
• Consult with Pool Processing Agent and other vendor contract representatives to obtain current state capacity focusing on pool issuance, monthly investor reporting and pool transfers.
Phase 1: Discovery
• Create high level mapping of current state functions (process flow)• Identify systems and databases mapped to each process and signify which are impacted by
the business change to loan level• Identify and recommend the addition of the key data tables and or data elements to allow
for loan to security connection. • Identify all files or data feeds that will be impacted by the change both internal to Company
XYZ and with Issuers or other counterparties
Phase 2: Current
State
• Finalize presentation that includes: Current State Analysis, Gap Analysis, Options for Meeting future state.
Phase 3: Managemen
t Presentation
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Stakeholder meetings
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Date Stakeholders Subject 1/14 Names of stakeholders Modernization
1/22 Loan-level future state
1/28 Loan-level future state
1/28 Data
1/29 Reporting & Reconciliation
1/29 Current state processing
2/4 Reporting & Reconciliation
2/12 Working session
2/18 Feedback session
3/9 Management Presentation Review
Note: Weekly Status Report meetings were held with working group members
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Current State: Company XYZ vs Industry Comparison
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The table below illustrates the key differences between Company XYZ and the Mortgage Industry both in terms of role name and responsibilities.
Responsibilities Mortgage Industry Role
Company XYZ Role
Key Difference
Pre-Issuance/Issuance Functions Seller and Issuer Issuer(Servicer)
In the Mortgage Industry, once Security or Bonds have been issued, the Seller or Issuer may not have any servicing rights to loans it issued.
(excludes PIIT program)
Advancing Delinquent Payments
Servicer or Subservicer Issuer(Servicer) The Servicer (barring a Subservicing Agreement giving this authority to the
Subservicer) is responsible for advancing funds for delinquent payments
Collecting Payments Servicer or Subservicer Issuer(Servicer) The entity servicing the loan (Servicer or Subservicer) is responsible for
collecting periodic mortgage payments.
Reporting Servicer Issuer(Servicer)The Subservicer does send collection reports to support fund sent to the
Servicer by the Subservicer. But reporting to the Trustee is the responsibility of the Servicer.
Owner of MSRs (with ability to transfer) Servicer Issuer(Servicer)
The Servicer may elect to sell MSRs in an open market to the highest bidder while Company XYZ requires the entity which issued the Securities to
initially hold these rights (excluding PIIT program)
Subservicing Functions Subservicer Subservicer A Mortgage Industry Subservicer is typically a servicing shop. Company XYZ requires Subservicers to be Company XYZ Approved Issuers.
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Current State - Loan Level Impact Areas
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What are the impacts from moving from a Pool Level model to a Loan Level model?
Loan-LevelPolicy
Business Process
Data
Technology Systems
People
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Current State: Summary Impact Assessment
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No changes neededSignificant changes needed
As of Q2- 2014
Loan-level Capabilities Policy Process Systems Data People
Program guide
Transfer of MSRs
Monthly Reporting and Reconciliations
Compliance
Limited changes needed
The Unissant/Actualize team evaluated Company XYZ’s key current loan-level capabilities across policy, process, systems, data, and people. The summary of the assessment is provided below:
Current State Key Findings Risks/Impact
Roles and responsibilities in the MBS guide do not conform to current industry practices.
Inflexibility of the MBS program will continue; participants may pursue more ‘industry standard’ options
Company XYZ current policy of only one Issuer per pool is limiting.
Prohibits MSR transfers within a pool at the loan-level; barrier for program entry for many participants including non-bank entities
Company XYZ’s reporting system can not receive multiple files from multiple issuers within a pool without failing
Prohibits multiple Servicers per pool.
A basic reconciliation occurs from loans to pool to security for one Issuer.
The current reconciliation functionality will not accommodate multiple Issuers/Servicers.
Company XYZ’s operational performance measures on Issuers/Servicers are inadequate and do not provide meaningful feedback
Without measuring “how the participants are performing servicing functions” Company XYZ will lack the necessary information for accurate forecasting and decision making.
Detailed impact analysis can be viewed in the Appendix section
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Future State
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• Align the Loan-level initiative with Company XYZ’s vision for a future state as illustrated in the white paper, ABC.
• Discuss proposed new roles and responsibilities, and options for a future state.
• Identify automated technology solutions for high-intensive analytical functions such as loan-level balance roll ups, pool to security roll ups, and payment tracking from Originators to Servicers to the Transfer agent.
The following slides focus on achieving the target state capabilities of a Loan-level model.
*****Insert logo of Company XYZ here*****
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Future State: Company XYZ’s Future Vision
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The Unissant/Actualize Team proposed a target state to align with Company XYZ’s future vision for its program.
Target State Capabilities BenefitsIdentify, understand, and plan for changes to the market environment and market participants.
•Residential MBS remains an economically viable activity•MSRs remain an attractive asset class.
Embrace the increasing presences of non-depository firms and the accompanying trend toward networked (specialized) firms.
•Value in diversity and innovation from these specialized firms•Opportunity to broaden access to the MBS program through non-traditional structures
Establish new measures and standards to assess operational and financial performance.
•Greater accuracy for portfolio valuations•Greater understanding of the participants operational performance.
Increase market liquidity both for the program and the program’s participants
•Opportunity to transfer MSRs at the loan-level and also divorce MSRs from servicing operations.•Recognition of entities that finance mortgage servicing operations.
Preserve Company XYZ’s long-term program by strengthening oversight on Issuers for non-compliance
•More active monitoring of Servicer activity and MSR values may allow for proactive remediation activities prior to economic event.
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Future State: Current State and Future State (proposed)
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Issuer/Servicer(75 loans)
Issuance:
Post Issuance:
Issuer/Servicer(75 MSRs)
Current State Future State
Issuer(75 loans)
Servicer 1(10 MSRs)
Servicer 2(35 MSRs)
Servicer 3(30 MSRs)
Each Issuer/Servicer can have multiple subservicers
The Issuer/Servicer can have only 1 subservicer
Pool 1075
Pool 1075
Post issuance, role changes from Issuer to Servicer
New role introducedAuthorized Servicer(One Servicer or Company
XYZ)
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Future State: Roles and Responsibilities
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Issuer(75 loans)
Servicer(10 MSRs)
Servicer 2(35 MSRs)
Servicer 3(30 MSRs)
Each Issuer/Servicer can have multiple subservicers
Pool 1075
* Post issuance, role changes from Issuer to Servicer
Future State Roles and Responsibilities
Issuer• Performs all current MBS Guide functions through Issuance
Authorized Servicer• Issuer or Company XYZ assumes this role at Issuance• RESPONSIBLE for authorizing drafts from central P&I custodial account (for all amounts
due to security holders and the guaranty fee due to Company XYZ)• Sign all accounting reports and certifications to Company XYZ and Remittance Advices to
Security Holders; also maintain registry for Security Holders.
Servicer • RESPONSIBLE to advance payments not made by borrowers and covers shortfalls in their
P&I accounts when drafted by the transfer agent for loans it holds MSRs to.• Responsible for being reimbursed for advances made prior to MSR sale.• PAYMENTS to security holders are drafted from Servicers P&I account by transfer agent
• ATTESTS to the UPB to all loans it holds MSRs for.• Provides oversight with any Subservicer(s) it enters into a Subservicing Agreement with.• REPORT into investor reporting system.
Subservicer• REPORT investor reporting system.• Perform all functions required in Subservicing Agreement entered into.• RESPONSIBLE for sending funds to Servicer for drafting by the transfer agent• Provide collection reports to Servicer so Servicer can validate cash received.
Issuance:
Post Issuance:
Authorized Servicer(One Servicer or Company
XYZ)
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Future State: Option 1 – Servicer as Authorized Servicer
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Issuance:
Post Issuance:
Issuer/Servicer 1(75 loans)
Authorized Servicer (10 MSRs)
Servicer 2(35 MSRs)
Servicer 3(30 MSRs)
Each Issuer/Servicer can have multiple subservicers
Pool 1075
The Authorized Servicer role is performed either by:• Issuer at Issuance who assumes the role of Servicer• A Servicer who purchases MSRs• Another Company XYZ approved Servicer (only if the first two options are not feasible)
The Servicers and Subservicers will report into the investor reporting system separately for the loans they service in the pool. Each Servicer will be responsible for advancing funds and/or covering shortfalls on the loans they hold MSRs to.
Funds can be remitted to one central P&I account administered by the Authorized Servicer to be drafted by the transfer agent. Another option is to have the transfer agent draft out of each Servicer’s P&I account (Custodial or Central).Placing responsibilities of the Authorized Servicer on one of the Servicers may not be economically viable to that Servicer if there is no compensation. This function may require additional resources to ensure adequate coverage of the Authorized Servicer responsibilities.
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Future State: Option 2 – Company XYZ as Authorized Servicer
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Issuance:
Post Issuance:
Issuer/Servicer 1(75 loans)
Servicer 1(10 MSRs)
Servicer 2(35 MSRs)
Servicer 3(30 MSRs)
Each Issuer/Servicer can have multiple subservicers
Pool 1075The Authorized Servicer role is performed by:
• Company XYZ or a Vendor it contracts with to perform this function.
The Servicers and Subservicers will report into the investor reporting separately for the loans they service in the pool. Each Servicer will be responsible for advancing funds and/or covering shortfalls on the loans they hold MSRs to.
The transfer agent will draft out of each Servicer’s P&I account (Custodial or Central). Company XYZ will have final authorization of each draft out of each Servicer’s P&I account.
Company XYZ
Company XYZ will need to ensure there are sufficient resources available for adequate coverage of the Authorized Servicer responsibilities.
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Future State: Interim-Only Solution
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Issuer(75 loans)
Servicer(75 MSRs)
Subservicer 1(35 loans)
Subservicer 2(30 loans)
Pool 1075
Issuance
Post-Issuance
Subservicer 3(10 loans)
Post-Issuance, the Issuer will now have the role of Servicer. The Servicer can only sell MSRs at the pool level per Company XYZ MBS Guidelines.
The Servicer may enter into as many Subservicing Agreements as it would like within a pool. Each Subservicer would continue to be an approved Company XYZ Issuer.
The Subservicers will report on their loans into the investor reporting system and will be required to send the Servicer a reconciliation of payments so the Servicer is aware of what payments are required to be advanced.
While each Subservicer can have its own Custodial P&I account, they will required to send payments to the Servicer and the Servicer will make available funds for the transfer agent to draft to pay the Security Holders.
This is an interim solution only and would not allow the Servicer to sell their MSRs at the loan-level.
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Future State: Automated Reconciliation Function
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Servicer 1(10 MSRs)
Servicer 2(35 MSRs)
Servicer 3(30 MSRs)
Pool 1075 “An Adaptive System”
Investor Reporting
System
New technology to be developed
Transfer Agent
Reports
Reconciled payments
Reconciled balances
Performs calculations• Loan-level roll up to pool• Pool roll up to security
Performs calculations• Reconciles cash from Servicers
Company XYZ should create a new technology system that allows Company XYZ, the Servicers, and the transfer agent to integrate reconciliations in a real-time processing environment.
Microsoft Office Excel Worksheet
Calculation Example
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ConclusionExecutive Summary
Scope: Company XYZ I pools are more problematic moving to a loan-level model. To lessen impacts, it should be considered to move only Company XYZ II pools to loan-level. Company XYZ I holders can convert to Company XYZ II to achieve new features
Policies: Policy changes will impact roles and responsibilities (i.e., Issuer, Servicer and Company XYZ), processes and procedures. We recommend a role of Servicer be established.
Processes: Internal and external business processes will be impacted with policy changes. It is expected that the Compliance and Monitoring, Eligibility, Investor Reporting and MSR process will have medium to high impacts while the Document Custodian Processes are minimally impacted.
Data: Loan-level data is currently collected at issuance and via monthly servicing files. The capture of additional loan level data would be minimal.
Systems: Low impact to issuance modules and high impact to post-issuance systems.
₋ ____ systems will potentially have significant business rules and reporting impacts.
₋ An automated function that reconciles loan-level to pool balances prior to funds being sent to the Pool Processing Agent needs to be created.
People: Company XYZ has limited resources to facilitate the large change. Reliance on vendors will be required in the short term; long-term Company XYZ should invest funds spent on consultants into creating the new automated reconciliation function. Also shift more analytical functions related to operations from vendor resources Company XYZ employees.
Approach Recommendation: Determine the role and responsibility Company XYZ wishes to perform in the future state model.
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Recommended Next Steps
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• Conduct deeper dives on roles and responsibilities, xyz system enhancements, which includes additional reconciliation calculations, and risk and control processes.
• Identify potential recommendations for current modernization projects that can further Loan Level objectives.
• Begin preliminary roadmap that includes high level scope and cost estimates.
Executive Summary
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Appendix
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Supporting Documentation • Loan Level to Modernization Initiatives• Current State Reporting and Reconciliation• Future State Reporting and Reconciliation• Future State Reconciliation example• Future State Roles and Responsibilities• Company XYZ Current State System Diagram• Company XYZ Future State System Diagram• Data Hierarchy View (Current and Future State)• Policy Impacts • Process & Data Impacts • System Impacts• People Impacts
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Loan Level to Modernization Initiatives
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A meeting is scheduled on March 27 to conduct walkthrough of Company XYZ’s vision and associated initiatives
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Future State Reconciliation example
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Microsoft Office Excel Worksheet
The attached Excel document simulates a Future State Security scenario. The scenario shows pools with multiple Servicers/Subservicers. The tabs are set up as follows.• Tab 1 – Show pool at a time where there have been loan-level MSRs sales with multiple
Subservicers. Each pool has an explanation of what happened within that pool.• Tab 2 – Illustrates what would be reported to the investor reporting system by each Servicer
and Subservicer.• Tab 3 – Shows what loans each Servicer is responsible for with regards to advancing/covering
shortfalls.• Tab 4 – Illustrates a sample report the Subservicers would sent to the Servicers so the
Servicer is aware of all subserviced loans they have to advance.
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Future-State Roles and Responsibilities
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Responsibility Option 1 Responsible Party Option 2 Responsible Party
Collect P&I and escrow amounts Servicer / Subservicer Servicer / SubservicerDeposit funds into P&I and escrow custodial accounts Servicer / Subservicer Servicer / SubservicerWithdraw funds from P&I custodial account Servicer / Subservicer Servicer / SubservicerWithdraw funds from escrow custodial accounts Servicer / Subservicer Servicer / SubservicerSupply funds for advances to security holders Servicer ServicerAbsorb losses on foreclosures not covered other settlements Servicer Servicer
Prepare and submit accounting reports to Company XYZ and UPB data to the UPB contractor Servicer / Subservicer Servicer / Subservicer
Sign all accounting reports and certifications to Company XYZ Servicer / Subservicer Servicer / SubservicerAccess documents at document custodian Servicer / Subservicer Servicer / SubservicerPrepare and send checks to security holders that are paid by check Servicer / Subservicer Servicer / SubservicerSign checks to security holders that are paid by check N/A N/AAuthorize withdrawal of funds from central P&I custodial account for payment of all book-entry securities and Company XYZ Guaranty Fee
Authorized Servicer Company XYZ
Prepare and send Remittance Advice to security holders Servicer / Subservicer Servicer / SubservicerSign Remittance Advice to security holders Servicer / Subservicer Servicer / SubservicerReport Monthly Guaranty Fees via xyz system Servicer / Subservicer Servicer / SubservicerFund the Guaranty Fee in the Central P&I Custodial Account for ACH Debit Servicer / Subservicer Servicer / SubservicerMaintain Register of Security Holders Authorized Servicer Company XYZ
Authorize withdrawal of funds from central P&I custodial account for payment to security holders and payment of Company XYZ Guaranty Fee
Authorized Servicer Company XYZ
Perform Accounting and Monitoring Functions of Participations related to HECM loans Servicer / Subservicer Servicer / SubservicerResponsibility not applicable to these options
Revised Responsibilities: Both Company XYZ programs
Revised Responsibilities: Additional Responsibilities for Ginnie Mae II MBS Programs
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Current and Future State – Data Diagram
Pool Tables (includes Issuer
info)
Pool – Loan Cross Reference
Table
Loan Tables
Pool Tables Pool-Servicer Tables
Pool – Loan Cross Reference Table
Loan Tables
Connected by Pool Unique ID
Connected by Loan Unique ID
Connected by Loan Unique ID
Connected by Pool Unique ID
Connected by Pool and Servicer ID
Issuer – Pool - Servicer Cross
Reference Table
Pool-Issuer Tables
Connected by Pool and Issuer ID
Data ManagementThe current state data structure is based on the assumption of one pool which contains many loans and each pool has only one Issuer associated. In the future state the assumption is that each pool will contain one or many loans and each pool can contain one or many Servicers. The diagram below illustrates these concepts.
Current State Future State
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Policy Impacts
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Current State Future State
Policy
A 'Servicer' entity does not exist in the MBS guide.
Roles and responsibilities
Investor Tax Reporting
Payment to security holders
Pool (loan) transfers
Standard policy for Issuer and Servicer application and eligibility
Report all pool level information including RPB and also submits loan level information
Comments
Transferring MSRs is industry wide performed between Servicers, not Issuers.
Current Post-Issuance roles and responsibilities of an Issuer resembles those of a Servicer.
Policy specifies Issuer
Transfer agent will continue to make payments to Security Holders.
MSR transfers do not exist within pools – a policy needs to be created.
Create policy for Servicer application and eligibility. Compliance changes
This will be one of the biggest changes to policy as the policy will need to rewritten to address aggregation methodology.
DK Don’t KnowSignificant changes needed
Limited changes needed
No changes needed
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Process & Data Impacts
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Current State Future State
Process
Servicer Eligibility
Servicing reports and reconciliation
Issuer/Servicer Compliance reviews (6 months)
Servicer Scorecard
Data
Transfer of MSRs
Document Custodian
Investor Tax Reporting
Data Architecture Changes Required
Additional Loan Level Data Needed
Data Structure Changes Required
Data Calculations/Rules Needed
Doesn’t exist
Comments
New process for Servicer eligibility
New functionality and new process needed
Currently performing at loan-levelLeverage existing Company XYZ II process
Can get by with little or no new data
Depends if calculations are stored in databases or calculated from data
ETL and data flows
DK Don’t Know
Change all databases
Splitting MSRs will create many new processes
New operational process for Servicers
Develop a scorecard for for Servicers
Significant changes needed
Limited changes needed
No changes needed
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System Impacts
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DK Don’t Know
Current State Future State
System name
Assemble and Submit Pool
Report UPB
System name
Perform Transfer of MSRs
Apply for Approval as Company XYZ Issuer
Apply for Commitment Authority
Assemble and Submit Pool and Loan Issuance Package
System name
Primary Data Repository for system name goes here
System name
Perform Pool, Loan Package and Loan Accounting Reporting
Aggregate UPB Balances and perform reconciliation
Collect Tax Report Information
Perform Agency Matching
Provide access to Disclosure of MBS Pools
System name goes here
System name goes here
Comments
Reconciliation enhancements neededxyz to continue performing this function
Additional reporting fields needed
Significant changes needed
Limited changes needed
No changes needed
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People Impacts
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Option #1 Future State
People
Resource required to perform data aggregation and reconciliation functions
Additional training (external)
Additional training (internal)
Review of existing vendor contracts
DK
Comments
Traning for Issuers/Servicers/Custodians
Training for Company XYZ and vendors
Policy change of splitting out MSRs and providing more authority to Servicers will impact vendor SLA’s.
Deeper analysis required depending on option selected
DK Don’t KnowSignificant changes needed
Limited changes needed
No changes needed