It’s almost a weekly news spectacle to see how the nation’s banking institutions have continued to adjust to the last-minute shifts on their balance sheets. It’s safe to say that 2013 was the year of preparation for all banks and mortgage servicers to adjust to the new regulations that officially start Jan. 1, 2014. But how will today’s banks and mortgage servicers thrive in this new regulatory environment?
Let’s agree that the banks and servicers have their work cut out for them for the next several years, as legislation will continue to be refined. The largest challenges for the country’s lenders are wrapped up in Basel II and III. Remember, these new capital requirements were designed for the U.S. banks to align with the standard capital requirements across the world.
The first part is the liquidity issue for these banks. The percentage of liquidity needed now is based on a risk-weighted asset, which has nearly tripled from 2.5% to 7%. In Basel II, the percentage was 2.5% and now with Basel III, 7% is the new minimum and that could possibly go even higher. This regulation results in a substantial increase of capital requirements for banks and lending institutions. More than ever, it comes down to a juggling act of deposits, loans and cash management. The focus relies on the art of cross-selling for the banks in order to keep the liquidity at a safe and consistent level.
Now, the second element of Basel III is the size of the banks’ balance sheets. We have seen a tremendous growth in these balance sheets due to the acquisitions of recent years. Basel III has taken big steps in limiting the activity based on capital, thus creating a leverage ratio that has been put in place to maintain the growth of the balance sheets.
It comes as no surprise that we are now seeing breaking news of major institutions like Citigroup, the third-largest U.S. bank, selling off the mortgage-servicing rights on $63 billion worth of loans, or about 21% of its total contracts at midyear, according to a Bloomsbury article published on Oct. 25, 2013. The article went on to say that the banks are scaling back from the almost $10 trillion market for Mortgage Servicing Rights (MSR) amid looming Basel III regulations.
Chris Whalen, managing director at Carrington Holding Co., in Greenwich, Conn., said, “Three years from now, banks will be making fewer real estate loans and servicing will be smaller. You will see the whole industry shift.”
Yes, the MSRs are being sold, but the banks still do not want to have the buyers cross-sell their banking customers. So they are trying to figure out how to sell their servicing rights while still sub-servicing their loans.
On the flip side, with tightening of legislation comes opportunity. Joseph DeDominicis, CEO of SN Servicing, based in Baton Rouge, La., said, “With the banks not being as aggressive on their pricing, they are not looking to build up that big of a book due to the capital that they will have to hold against those MSRs.”
He added, “They are not going to be as aggressive, which leaves us a lot more area to play in than before. So the mortgage originators who used to sell to the big banks are now looking at us because our pricing is very competitive, if not better than what the big banks are offering, thus resulting in us getting a whole lot more attention from the originators. We’ve added six new originators in the last two weeks that were previously selling to Wells, Chase and Citi.”
Now, besides the capital requirements, it seems that regulators are really focused on trying to help the consumer make contact or communicate with the servicer/lender. With all the red tape for lenders and servicers, the regulators are trying to create a clear channel for borrowers to reach their lenders. With the mega servicers being so huge and with the challenge they face in having hundreds of thousands of borrowers to collect from, borrowers sometimes get lost in the shuffle.
Truth be told, none of the mega servicers were really set up to handle the onslaught of loss mitigations on millions of defaulted mortgages.
I recently caught up with Mark Latimer, the former SVP of capital markets for Freddie Mac, and asked him how many residential defaulted mortgages are currently held by the banks and private equity groups. He explained that with all the data he had studied over the last two years, he would put the numbers at more than 3.5 million-plus units of residential defaulted mortgages.
“The unknown data is really the number of units that the large hedge funds and private equity groups control. They are not responsible to post their data like the GSEs are and we know there have been hundreds of billions worth of defaulted mortgages sold to the private sector,” Latimer said.
It’s shocking to hear, but according to DeDominicis, “Some of these large portfolios that have been transferred in from some of these big banks, the borrowers haven’t been contacted in years.”
He mentioned that after numerous loss mitigation attempts, including phone calls and letters, these loans go into a “no calling” queue and just sit there.
DeDominicis mentioned that the servicers with a great foundation would continue to grow and tweak their already successful loss-mitigation-servicing platforms. The companies who don’t have the correct systems in place will run into issues with the Consumer Financial Protection Bureau (CFPB).
DeDominicis is very confident that SN Servicing, which offers agency servicing as well as specialty servicing, will thrive during the tightening from the CFPB due to their collection model of having a single- point-of-contact for loss mitigation. “Yes, the cost to service is going up,” he said. “There is no way around it. The days of servicing current loans for $10- $15 per month will not be in place much longer.”
What about the smaller statewide servicers? “I don’t know how the smaller servicers will survive even if they service a handful of states with the servicing fees of 25bps for fixed rate loans and 371⁄2 bps for ARMS.”
Gordon Albrecht, senior director of marketing and strategies for FCI Lender Services in Anaheim, Calif., says he is noticing that many lenders are confused on the new regulations because states like California and Nevada have been focusing on owner-occupied single- family residences, whereas the new CFPB regulations are broader, focusing on all single-family residences, regardless of who owns the property. He said, “This is huge for the servicing world and FCI has spent the last year and a half, plus a million dollars in capital, on getting ready to program it for the big change.”
Albrecht also mentioned, “Since regulations cost money to meet, it’s no surprise that the fees will be felt all the way down to the consumers’ pockets during origination. One of the biggest concerns is that the higher costs of servicing were not built in when all these legacy loans were originated and that’s the reason why lenders are unloading these servicing rights.”
As the smaller servicers seem to vanish, the medium to midsize servicers are growing at a record pace each quarter. FCI has seen its book of business grow from $1.7 billion to over $2.5 billion in just over the last year and a half.
The servicers who have the correct processes in place and have adjusted their technology over the last year will certainly reap the benefits of growth and profits; meanwhile the companies who did not properly staff and are not well capitalized will soon be out of the business. It seems the days of mega servicers has reached a cap and the opportunity for midsized servicers are bright and will flourish as long as they are prepared for the adjusting regulations.
