©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Sunset Seminar Mortgage Servicing: Current State & Future Trends
May 6, 2015
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Faith Schwartz, SVP, Government & Public Affairs, CoreLogic
Mortgage Servicing: Current State & Future Trends
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential. ©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Background & Current State
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©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Mortgage Servicing Regulatory Emphasis The Lead Up
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Early 2011
Prudential bank regulators form an interagency working group on the issue of mortgage servicing: HUD, FHFA, Treasury
April 2011 FHFA announces the Servicing Alignment Initiative for GSE to create consistent procedures for servicing mortgages upon going delinquent
July 2011 The CFPB joined the interagency working group
January 2012 HAMP is extended for the first time through 2013 and later through 2015
April of 2011 Federal Reserve, OCC, FDIC complete Consent Orders with the nation’s largest servicers that resulted in corrective action
DOJ and 49 State AG reach a $25 billion settlement with the five largest servicers February 2012
April 2012 The CFPB releases a regulatory roadmap of the mortgage servicing industry
FHFA announces the Servicing Alignment Initiative for GSE to create consistent procedures for servicing mortgages upon going delinquent
The CFPB joined the interagency working group
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Additional Rulemakings A Number of Rules Become Effective
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Ability to Repay and Qualified
Mortgage (effective 1/10/14)
Lenders must assess a borrower’s reasonable ability to repay a mortgage “Qualified mortgages” meet the new ability to repay standard Investors share in liability Impact of regulation still being assessed
Mortgage Loan Officer Comp (effective 1/10/14)
Servicing Standards
(effective 1/10/14)
New series of requirements relating to how loans are serviced that focus on requiring increased high-touch service and explicit timelines
Includes: ‘error resolution procedures;’ ‘continuity of contact;’ ‘request for information;’ and ‘information management procedures.’
Integrated Mortgage
Disclosures (effective Aug. 2015)
Replacement of Good Faith Estimate under TILA and RESPA with new loan estimate
Replace HUD-1 disclosure at closing with new disclosure and creditors responsible for content
Increased frequency of disclosures and earlier in process
Qualified Residential
Mortgage (QRM) Final
Aligned QRM credit risk retention definition with CFPB QM definition Allows for government exemption from 5 percent risk retention
CFPB has proposed additional fields it intends to capture for reporting including quarterly reporting proposed for large institutions
Outlined proposal includes a number of data fields beyond the statutory requirements in the DFA
Home Mortgage Disclosure Act (proposal stage)
Restrictions on compensation to MLO employees, including on bonus plans
MLO registration and oversight
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential. 6
Servicing Timelines Remain Elevated
Source: CoreLogic, True Standings
Phoenix CAPITAL
Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070 | www.phnxcap.com
Private & Confidential
The Mortgage Servicing
Rights Market | Current State and Future Trends|
Stephen Fleming, Senior Vice President
Urban Institute & CoreLogic May 6, 2015 Washington, DC
Private & Confidential 8
MSR Major Revenue Components
Service fee – largest component typically of income and is represented in terms of bps times the unpaid principal balance Self amortizes as loan pays down, service fee declines with the UPB of the loan
An avg balance of $300K generates $750 a year, while a avg of $100K generates $250 a year based on a 25 bps servicing strip
Servicer is paid only if the borrower makes a payment for FNMA, FHLMC and GNMAs
Ancillary and Late Fee Income – typically expressed in term of dollars per loan
Float earnings on payments, payoffs and escrowed – servicer needs to have the ability to earn float on these funds (typically banks) and depending on overall level of interest rates, can have material impact to the valuation Payment and payoff float is driven by remittance type Escrows are impacted on timing of remittance of funds and whether interest
on escrow (IOE) must be paid Tax remittance is driven at the state level for valuations IOE assumption is applied at the state level
Private & Confidential 9
MSR Major Expense Components
Cost to service – typically layered in on several factors including Investor
Conventional FHV / VA
Product type Fixed versus ARM
Geography (especially for foreclosure costs) Judicial versus non judicial states
Delinquency status Cost are increased for each level of delinquency
Unreimbursed foreclosure costs Driven by investor
Cost of Advances made by servicer on behalf of delinquent borrowers
Some expenses may be netted against offsetting income items such as interest on escrow and prepaid interest lost
Private & Confidential 10
Revenues
•Service fee revenue
•Escrow float earnings
•P&I and payoff float earnings
•Ancillary income (e.g. late fees, modification income, optional insurance, etc.)
Expenses
•Servicing costs
•Additional costs for delinquent loans and foreclosures
•Advances on delinquent P&I and escrow payments
•Interest owed on escrow accounts (i.e., for CA, CT, MA, ME, NY, OR, RI, UT, VT and WI)
•Interest owed on early payoffs (unique to scheduled / scheduled products)
Prepayments
•Voluntary payoffs – Refinances
•Involuntary payoffs – Foreclosures
*Prepayment speeds are the key driver behind servicing values (on performing or new production): • The longer a performing MSR is held in the portfolio, the more revenue will be received • As interest rates rise, prepayment speeds will slow down, that increases the duration and resulting value of the MSR • Conversely, as interest rates drop, prepayment speeds will rise, which will decrease the life and the value of the MSR
MSR asset value is comprised of many layered, moving pieces:
MSR Asset Components – Summary
Private & Confidential 11
Looking back, MSR trading levels hit a bottom in the 2nd half of 2012 (see following graph slide), with only 2 to 3 potential flow buyers in the market
2014 pricing only furthered the 2013 pronounced strengthening trend
2015 has been very … interesting: o Liquidity is present but has become more specific o Supply and demand are more dependent on structure (flow vs bulk vs IO,
etc), counterparty risk, investor profile, deal size, and loan-level attributes • Ocwen, large direct deals, etc.
o Jan rates slid precipitously; Feb rates behaved better for MSRs; Mar rates saw-toothed sideways/downwards; Apr rates plateau’d VOLATILITY
o Values have become more tenuous, with buyers focusing intently on: • Heightened rate volatility • Flat yield curve
o Translating into a wider dispersion of bid levels across a wide pool of demand o Pricing analysis is getting more and more granular
… And let’s see what the rest of the 2nd, 3rd and 4th quarters bring!...
MSR Market Executive Overview
Private & Confidential 12
Historical MSR Pricing - Conventional
Private & Confidential 13
Historical MSR Pricing - Government
Private & Confidential 14
Bulk versus Flow Pricing
Bulk Pricing
Driven by a number of factor including: Level of interest rate in portfolio versus
current mortgage rates Loan level characteristics
FICO LTV Geography
Historical performance including payment and prepayment history
Strength of counterparty to stand behind reps and warrants
Repurchase history is critical
Flow Pricing
Driven by the expectation of rates in addition to the expected loan characteristics
Viewed as a long term relationship and
partnership (versus a transaction)
Complex pricing grids are produced by the MSR buyers
Private & Confidential 15
Early 2015 MSR Observations
A more balanced MSR market is expected in 2015, as the servicing sales supply may outpace the buy side demand
Ocwen portfolios are likely to dominate the market during the first half of 2015; however, it is unclear outside of Nationstar who will purchase them (bank buyer(s) for other portions?)
The initial drop in rates in January have created a miniature refinance opportunity
Large bulks (over $1 billion in UPB) and larger flows (over $100 million a month in delivers) receive the best pricing and greatest number of bids
Buyers are becoming more selective in bidding and unlike 2013 and the first nine months of 2014, don’t bid on every MSR portfolio making the success rate (closed deals) lower in the first few months of 2015 compared to 2014
MSR Financing continues to be an increasing trend (also for independents)
Private & Confidential 16
2015 MSR Outlook
As we discussed earlier, the MSR market continues to shift; however, the volume of deals placed in the market (and done directly) remains elevated:
General shift towards equilibrium (buy-side bias?)
Despite a drop in rates in January, the refinance wave is likely to be short-lived and pressure to execute servicing trades will continue to increase
Buyers that have reached critical mass will bid less aggressively (except for the most pristine packages)
Buyers will more closely evaluate forecasted vs actual performance (e.g. anticipated returns vs actual returns)
MSR buyers that did not reach critical mass are likely to exit the servicing business over the next 12 months
It appears more downward pressure on value exists than upward pressure, and depending on the clearing price, some MSR sellers are likely to be disappointed with their execution
Private & Confidential Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070 | www.phnxcap.com
Key Contact Information:
Stephen Fleming Senior Vice President
(303) 539-7249 [email protected]
Private & Confidential 18
Appendix: Phoenix Family of Companies Update
The Phoenix Family of Companies continues to be the industry leading MSR advisory firm as it offers comprehensive solutions for its client base:
Phoenix Capital, Inc. After trading approximately $500 billion in MSRs in 2013, Phoenix has successfully traded over $100 billion in UPB in YTD 2014 representing nearly 50 distinct bulk and flow MSR transactions of Fannie
Mae, Freddie Mac, Ginnie Mae and Private Investor MSR’s
Phoenix Analytic Services, Inc. Provides MSR valuations and analytics including customized economic valuations and customized SRP
grids in addition to full MSR Accounting outsourcing
Phoenix Collateral Advisors, LLC. With the addition of John Burnett is the Fall of 2013, provides servicer surveillance and advisory
services for both large and small servicers and monitoring sub-servicers
Phoenix Asset Management, LLC Provide REO, Short Sales and component outsourcing for its clients
Phoenix Whole Loan Solutions (a/k/a) Steel Mountain Loan Trading, LLC
Provide whole loan trading solutions for its clients
Appendix: The Phoenix Family
©National Consumer Law Center
Mortgage Servicing: Current State and Future Trends
Alys Cohen
©National Consumer Law Center www.nclc.org
The Big Picture • Are communities still facing fallout from the housing crisis? • Are servicer incentives aligned with homeowners and
investors? • Can streamlined rules aid both homeowners and industry? • Where do homeowners stand when servicing rights are
transferred? • Why the delays in foreclosure resolutions?
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©National Consumer Law Center www.nclc.org
The NCLC Survey
• Nationwide survey from February 24 to March 3, 2015, of more than 100 attorneys and housing counselors representing homeowners.
• Results show urgent need for further
reforms.
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©National Consumer Law Center www.nclc.org
Key Findings • Enhanced protections needed to:
– Help successors in interest avoid foreclosure;
– Close the “complete application” loopholes; and
– Allow subsequent applications for new
hardship. 22
©National Consumer Law Center www.nclc.org
Challenges Faced by Successors
• Widows, orphans, other heirs • Homeowners but not on loan • Need loan information • May need loan modification to keep home
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Graph 1: Which of the following have you experienced when trying to get the servicer to acknowledge your client as a successor? (Check all that apply.)
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Graph 2: Where you have been contacted by a successor who needs a loan modification and is facing the risk of foreclosure, how did the servicer respond?
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Graph 3: Have you been contacted by a joint owner of the house who is on the mortgage/deed of trust but not on the note, where your client is a co-owner and there has been no recent transfer of the house? This may come up in cases of separation, abandonment, domestic violence, unmarried partners, etc.
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Graph 4: If yes, did you have difficulty trying to get the servicer to communicate with your client?
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Graph 5: If yes, did you have difficulty getting the servicer to let your client apply for a loan modification?
©National Consumer Law Center www.nclc.org
Roadblocks to Completing Applications
• “Complete application” is required before “dual tracking” protections apply.
• Increased fees, interest accrual,
unnecessary foreclosures.
• “Initial package” standard would incentivize more efficient reviews. 29
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Graph 6: In the past year, how often have you had trouble with servicers requesting some documents, then requesting others (piecemeal)?
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Graph 7: In the past year, how often have you had trouble with servicers asking for the same documents over and over again?
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Graph 8: How often does a servicer ask for additional documents after your client has submitted everything the servicer requested in the 5-day letter?
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Graph 9: How often do servicers initiate foreclosure after you have been told (for the first time) that the application is complete (or your client has provided everything the servicer requested in the 5-day letter) but the servicer then requested additional or duplicative information?
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Graph 10: On average, how long is it taking for your clients to get their loan modifications reviewed, from start to finish?
©National Consumer Law Center www.nclc.org
Homeowners with Subsequent Hardships
• CFPB rules only apply to first complete application. Even if you didn’t qualify.
• Yet, homeowners often face a change in circumstances (new hardship). – Death of a spouse, job loss, medical debt
• Servicers often evaluate subsequent applications (often are required to do so).
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Graph 11: How often in the cases you are handling has a servicer reviewed an application from your client (where one was submitted) even though a decision was made on an earlier complete application submitted after 1/10/14? (In other words, how often are you representing people with "subsequent applications," and servicer does not object to reviewing the application?)
©National Consumer Law Center www.nclc.org
What’s next? • Tighten regulatory loopholes • Reform servicer compensation • Ensure broad access to credit and fair
servicing • Establish a post-HAMP plan
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Presented by Jeffrey P. Naimon Partner BuckleySandler LLP
Mortgage Servicing: Current State and Future Trends
Outside Counsel's View
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• Compliance with new CFPB servicing rules – Will the new rigidified requirements over what was traditionally
an informal process result in better outcomes for borrowers , servicers or investors?
– Intense scrutiny by CFPB examination teams • Compliance with mortgage servicing transfer bulletin • Increasing applicability of FDCPA requirements and
prohibitions on all servicing activities • Additional foreclosure protections and "homeowner bill
of rights" laws creating more legal traps • Vacant property/REO requirements
Biggest regulatory issues
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Biggest regulatory issues - Continued
• Regulatory criticism of legacy systems, ongoing use of multiple systems, "inadequate" staffing
• What is an appropriate error rate – Does everything have to be perfect all the time? – Does anyone want to pay for what perfection (or closer to
perfection) costs?
Mortgage Servicing: Current State and Future Trends
Laurie Goodman, Director
Housing Finance Policy Center
Urban Institute
Sunset Seminar V
May 6, 2015
Mortgage servicing issues
• Servicing costs are high
• Timelines are very long
• Uncertainty and mixed messages regarding the treatment of delinquent
borrowers
- Basic attitude differences between CFPB and GSEs/FHA
- GSE compensatory fees
- FHA first legal deadline and other issues
• Servicing is an important contributor to tight credit
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0
500
1,000
1,500
2,000
2,500
2008 2009 2010 2011 2012 2013 2014
Performing Non-performing$ per loan
Servicing costs per loan are way up, productivity down
Sources: Mortgage Bankers Association and Urban Institute calculations.
# loans serviced 1638 1101 1128 893 766 647 706 per servicing employee
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10
15
20
25
30
35
40
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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Judicial States
All States
Nonjudicial States
Source: Larry Cordell and Lauren Lambie-Hanson, “A Cost-Benefit Analysis of Judicial Foreclosure Delay and a Preliminary Look at New Mortgage Servicing Rules,” Federal Reserve Bank of Philadelphia, March 2015.
REO timelines by date of liquidation Months
For Freddie Mac loans experiencing a credit event…
State Current or prepaid (%)
Already liquidated (%)
Not current, not liquidated (%)
Judicial 23.1 45.5 31.3
NY, NJ, CT, FL 23.6 37.8 38.6
Other judicial 22.7 51.8 25.6
Non-judicial 21.7 60.2 18.0
All 22.3 53.8 23.8
Source: Urban Institute calculations from Freddie Mac data.
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First missed payment (0 days)
Borrower submits complete loss mitigation application (116 days)
Earliest allowable initiation of foreclosure process (121 days)
Servicer responds to loss mitigation application (146 days)
Borrower appeals servicer response (160 days)
Servicer evaluates and denies appeal, refers loan to foreclosure (190 days)
Foreclosure attorney initiates foreclosure (220 days)
Servicing a non-performing FHA loan– an example
Here is a timeline in which both the borrower and servicer comply with CFPB guidelines:
The servicer misses the FHA’s 210 day deadline to initiate foreclosure. For a loan with an unpaid principal balance (UPB) of $150,000, the penalty would be roughly $7,500, or 5% of the loan.
$150,000 (UPB) x .025 (debenture rate) x 2 (years to convey property to HUD) = $7,500
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Credit scores much tighter…
500
550
600
650
700
750
800
850
2001 2003 2005 2007 2009 2011 2013
FICO Score at Origination
90th percentile Mean Median 10th percentile
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Source: Urban Institute calculations from CoreLogic Servicing data.
2015
…though LTV and DTI less so
30
40
50
60
70
80
90
100
110
2001 2003 2005 2007 2009 2011 2013
Combined LTV at Origination
90th percentile Mean Median 10th percentile
49 Source: Urban Institute calculations from CoreLogic Servicing data.
0
10
20
30
40
50
60
2001 2003 2005 2007 2009 2011 2013 2015
90th percentile Mean Median 10th percentile
Debt-to-income Ratio at Origination
2015
0
2
4
6
8
10
12
14
16
18
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Credit Availability Index shows overall tightness Percent
Product risk
Total without risky products
Sources: CoreLogic, HMDA and Urban Institute calculations.
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Sunset Seminar Mortgage Servicing: Current State & Future Trends
Alys Cohen, attorney, National Consumer Law Center Michael Drayne, senior vice president, Ginnie Mae Stephen B. Fleming, senior vice president of Phoenix Capital, Inc. Laurie Goodman, director, Housing Finance Policy Center, Urban
Institute Jeffrey Naimon, partner, BuckleySandler LLP Faith Schwartz, senior vice president of government and public
affairs, CoreLogic
May 6, 2015