THE COST OF DOING (SERVICING) BUSINESS – LITTON ON THE ROPES

From a report today in HousingWire, Goldman Sachs acknowledged a $220M expense in the first quarter of 2011 relating mostly to its operations of its mortgage servicing arm, Litton Loan Services. Such a huge wallop to earnings means that the attempt by Goldman to manage cash-flow of securitization structures through the servicing of the loans has not played out as well as expected. Remember, Goldman got into servicing back in 2007 when it purchased Litton from C-BASS.

In the game of servicing, it is all about cost containment. Generally, servicers are allowed to make 25bps on each loan it services for the securitization trust, where a majority of the loans are actually owned. From this fee, servicers are expected to send statements, follow-up on lagging payments and manage the loss mitigation (modifications, short sales, deed-in-lieu, etc.), foreclosure and subsequent REO acquisition and sale. In certain situations, that fee can be extending to include up to 50 bps for “special servicing.”  But in either case, the ability to make money in the servicing game is solely based upon keeping the costs associated with these services to the securitization trust at a minimum. This is why the servicing shops ran into the problem with robo-signing, sewer service and pushing for the “rocket-docket” in Florida.

Now, the servicing shops are facing new, costly, regulatory compliance requirements. The OCC and OTS, with the backing of the Federal Reserve, have gotten the major mortgage servicers to executed Consent Orders this past week, requiring that they clean up their foreclosure practices. This will add another layer of cost to an already thinly stretched bottom line to servicers.  Fortunately for Goldman and Litton, they were not part of this regulatory round-up. However, there is still the 50 state Attorneys General action that has still yet to be flushed out, which will probably cover Litton’s practices.

Add to this the ever looming requirement that servicers advance delinquent payments of interest and principal to securitization investors and you can see why Goldman is looking to pull its chute and bail from the mortgage servicing business.

What is interesting to see is the players expressing interest in the Litton servicing portfolio. Ocwen Financial, which recently just digested HomEq Servicing, has expressed interest. Homeq was originally the servicing platform for The Money Store and started its independent life following the acquisition of The Money Store by First Union/Wachoiva. Wachovia subsequently sold HomEq to Barclays, which then sold it to Ocwen. The other player presumably expressing interest in the platform or its servicing rights is Carrington Mortgage Services, which is made up of mostly ex-Fremont Investment & Loan servicing employees, especially in senior management.

So, with Goldman looking to say “adieu” to residential mortgage servicing, clearly it is time to rethink what  is the benefit to collecting payments in an industry overwhelmed with problems. Because, as the preeminent negotiators on Wall Street, Goldman always does what is best for Goldman. All that otherwise can be said is  “Caveat Emptor”!

AND THE FEDERAL GOVERNMENT STEPS UP TO THE PLATE WITH THE BIG BAT FOR SERVICERS

The Office of Comptroller of the Currency and the Federal Reserve got the largest of residential mortgage servicer to sign “Stipulation and Consent to Issuance of a Consent Order” today, forcing the servicers to take a look at their prior practices that allowed for robo-signing and improper foreclosure practices and to make changes to those processes in pretty quick order.

Of those servicers hit with the Order include Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, Ally Financial, HSBC North America Holdings, PNC Financial Services, U.S. Bancorp, MetLife  and SunTrust Banks.

The Order appears to basically address the “robo-signing” issues that have plagued the servicing industry since last year. Claims by the OCC were that the servicers:

·         Filed affidavits in state and federal court in which the affiant represented that the assertions in the affidavit were made based on personal knowledge or based on a review by the affiant of the relevant books and records, when, in many cases, they were not based on such personal knowledge or review of the relevant books and records ;

·         Filed numerous affidavits or other mortgage-related documents that were not properly notarized, specifically that were not signed or affirmed in the presence of a notary;

·         Litigated foreclosure and bankruptcy proceedings and initiated non-judicial foreclosure proceedings without always ensuring that the promissory note and mortgage document were properly endorsed or assigned and, if necessary, in the possession of the appropriate party at the appropriate time;

·         Failed to devote sufficient financial, staffing and managerial resources to ensure proper administration of its foreclosure processes;

·         Failed to devote to its foreclosure processes adequate oversight, internal controls, policies, and procedures, compliance risk management, internal audit, third party management, and training; and

·         Failed sufficiently to oversee outside counsel and other third-party providers handling foreclosure-related services.

In light of these findings, servicers are now being required to:

·         Develop Oversight Committees within 5 days to monitor and coordinate compliance with the Order;

·         Provide the Board of Directors of the Servicer with a Compliance Tracking Report within 90 days (and every 30 days thereafter), showing the progress in complying with the Order, for which the Board will then, within 10 days, have to enter such report and their findings into the corporate records.

·         Build appropriate Compliance Programs within 60 days to ensure that all servicing and foreclosure actions company with all applicable legal requirements. This Compliance Program will then need to be implemented within 120 days.

·         Provide the Regional Director of the OCC within 60 days

o   an acceptable plan (the “Action Plan”) to achieve full compliance with the Order.

§  to include effective mortgage servicing, foreclosure and loss mitigation actions, as well as associated risk management, compliance, quality control, audit, training and staffing.

o   policies and procedures for outsourcing foreclosure and related functions, with implementation with 120 days;

o   a plan to ensure appropriate controls and oversight with respect to MERS and its rules;

o   a management information system for foreclosure and loss mitigation;

o   an acceptable plan, along with a timeline, for ensuring effective coordination of communications with borrowers, both oral and written, related to Loss Mitigation or loan modification and foreclosure activities;

·         Provide within 45 days for an OCC approved independent consultant to conduct reviews of foreclosure actions

o   The OCC shall review the terms and methodology to be used by the independent consultant.  

What does all this mean? Well, in the first place, the cost to service loans will now become much more expensive, as these policies and procedures will require significant more man-hours. Anytime you build more policies and procedures with specific reporting requirements, costs go up. At 25 bps, servicers are going to be squeezed, at least in the short term, until efficiencies can be found to comply with these new requirements. This will be similar to the implementation for SOX, except that the servicers have limited revenue generation, which is now going to be scrutinized by the government.

Secondly, this can turn out to be another boon-doggle for the plaintiffs’ bar, like the first round of MERS litigation. Until the courts get their heads around what is going on, slick plaintiff’s attorneys will use these new requirements to forestall the foreclosure of their delinquent borrower clients even more. Which also mean higher costs to servicers and slower repayment of servicing advances as servicers are dragged into slower foreclosures.

Lastly, investors will be left waiting for their money even longer, if they get any at all, as the time to foreclosure and resell the home, as well as the cost of foreclosure (which may now include the policies and procedure costs), will be passed along into the securitization trusts. More government intervention always means less money to the investor.

So, while there was clearly a need to fix the broken foreclosure process following the over-greased skids that were in place, the OCC’s efforts to right the ship may have sent the boat over the other way. Let us hope that if that is the case, like in the last “Pirates of the Caribbean” movie, turning the ship upside-down actually gets us out of this “Davy Jones’ locker” of mortgage servicing. But then again, that was Hollywood and Disney.