Magazine article Mortgage Banking

Servicing Costs Rising for Private Loan Pools. (Servicing)

Magazine article Mortgage Banking

Servicing Costs Rising for Private Loan Pools. (Servicing)

Article excerpt

WALL STREET'S CREATIVITY AND ITS insatiable appetite for whole loans have been a profitable blessing to secondary marketing managers. Yet they have been a costly curse to investor accounting departments. Investor accounting costs are rising sharply in many firms that sold and continued to service large groups of whole loans with scheduled interest and scheduled principal remittance requirements.

Senior executives need to fully understand the problems servicing departments face with private pools, because resolving them will require significant outlays for people and technology. The cost per loan to service private deals is likely to increase from 10 percent to 30 percent over the next year.

These costs could outstrip savings generated by greater efficiency in other areas of servicing, according to servicing and investor accounting managers interviewed for this column. On the other hand, servicing fees for loans in private pools are more than 25 basis points, and the average loan balances are higher than agency levels, Typically, sales of loans into the pools have been profitable for sellers and improved their risk position.

Over the past 24 months, most of the fieldwork the Mortgage Dynamics Inc. (MDI) Investor Accounting Center in Denver has performed involved servicers' problems with private whole loan packages. This column is based on our consulting experiences and/or interviews with 10 companies, five of which are among the 20 largest servicers.

These companies are addressing these issues as servicers, master servicers, subservicers or all three. All of the major servicing systems are represented by these servicers. All parties interviewed requested that neither their names nor company names be used.

The transactions

Whole loan sales and private securities are not new. The current problems discussed here have been building for the past few years as the volume of whole loan sales has risen dramatically and the products and servicing agreements have moved further away from Fannie Mae and Freddie Mac norms.

A major wrinkle is that resales of individual loans within pools have mushroomed. "These transactions are killing us," the head of investor accounting for a large servicer says. "We used to see maybe one trade of a subset of loans in a pool once every six months. Now we see reconstitutions within the same pool three to four times in 12 months. The servicer finds out about the sale at the last minute, or after the fact. Sometimes we find out when we send the check and report for the pool, [and] the investor tells us some of the loans have been sold to a new investor."

In some cases, securities are being called, then the loans are combined with other loans and new securities are issued. Some servicers say that their reconstitutions are five times what they were a few years ago.

Frequently, the managers are faced with late investor notification of a sale--or no notification at all, sales to the new investor at incorrect scheduled balances and servicing systems that do not handle these complex reporting and bank account reconciliation tasks. They have no choice but to do much of their work offline.

The credit levels involved in these transactions range from subprime to A-plus-quality loans. Loan products range from traditional mortgage products to inventive products such as interest-only loans, skip-payment and nonperforming loans (i.e., early pool Ginnie Mae buyouts).

"Some of the products, such as daily simple interest loans and nonperforming loans, are not well-suited to scheduled/scheduled remittances, but are being sold that way," one manager says. "Capital markets guys are moving forward with these programs, often without appropriate communication with servicing, so we don't have adequate time to prepare for these products, and our systems will not support the investor accounting functions for them." Most of the managers we interviewed have sought and obtained better communication with capital markets department staffs. …

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