In another acknowledgement that servicing residential mortgage loans isn’t all that it is cracked up to be, Wells Fargo announced that it is reducing the value of its mortgage servicing rights (MSRs) by $214 million in the first quarter based upon higher projected costs for loss-mitigation and foreclosure. Following the Consent Order that the major servicers, including Wells, signed last week with their federal regulator (either the OCC or the OTS together with the Federal Reserve) JPMorgan also acknowledgement that the cost of the Consent Order it signed will haircut its MSR valuation by $1.2 billion in the first quarter. Interestingly, Citigroup announced at the beginning of this week that the Consent Order it signed with the OCC will only cost the bank between $25 million and $30 million annually. Maybe they got a better deal?
Whatever the costs associated with the new regulatory requirements to be instituted, it is clear that there aren’t going to be blue skies ahead for the servicers. Beyond the Consent Orders, there is still the brewing of the 50 (now 49, since Oklahoma broke from the pack) Attorneys General action against the servicers, as well as the FDIC’s new insurance/risk balancing act. Defaults are not slowing down, REO assets are stockpiling, and the governments newest attempt to move REO inventory by allowing IRA moneys to be used to purchase foreclosure homes is not a very strong solution to the problem. And as the pack leader, Goldman’s announcement that it is looking to sell its mortgage servicing company, Litton Loan Servicing, indicates that there isn’t any meat left on this bone.
So, what is a servicer to do? Well, back in the day, the servicer was part of the origination platform. Because of that, the economics of the servicing were different, since the originator would then retain the residual pieces of the deal. With “gain-on-sale” and the use of “creative accounting” on the prepayment assumptions, servicing looked like a winner, since money out of one pocket (the servicer) came back into the other pocket (at least for accounting purposes) on the residual certificate. Once the connection between origination and servicing was broken, and residuals were sold into NIM structures, the plight of the servicer was sealed. Now, it is a matter of marginalizing costs, meaning the cheaper the better. This is why HAMP didn’t work (modifications are really just re-underwriting the loan, which has a significant cost) and why there is a need to foreclose (cost containment and reimbursement of advances).
The entire industry has to be reworked, as well as re-adjusting the fees paid to make it economically feasible for servicers to manage the cash-flow from a less “squeezed” position. But, unfortunately, the servicers are operating under agreements (the Pooling and Servicing Agreement) that never contemplated this level of stress. And investors will never allow the servicers to change the terms, for it will only be a detriment to the investors. So, the deals are going to have to run out before the servicing shops will be able to find some relief. That, or servicers will have to “game” the system (robo-signing, “rocket-docket” and the like) to maintain profitability.
So, let the games begin (or continue). But now it appears that the referees are at least trying to keep the playing field level (until, like Washington and state regulators have done in the past, elections are over, people get bored/tired with hearing about the problems and certain men with certain bags of money appear and the rules get forgotten).
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