A Message from Terry Carr, Senior Advisor, Communications and Congressional Relations
For the past 18 months, the mortgage servicing industry has seen a significant increase in the number and size of servicing transfers. As a result, the Consumer Financial Protection Bureau (CFPB) released guidelines in February for servicers involved in transfers of mortgage servicing rights (MSRs). These guidelines are intended to protect consumers, especially those engaged in a loss mitigation process with their servicers during such loan transfers. The U.S. Department of Housing and Urban Development (HUD) supports the guidelines released by CFPB, noting that the efforts to improve servicer compliance should result in better outcomes for consumers and investors.
The CFPB guidelines are of particular interest to Ginnie Mae as our leadership team projects that a significant amount of our servicing portfolio is likely to change hands this year. I sat down with Michael Drayne, senior vice president of Ginnie Mae’s Office of Issuer and Portfolio Management, to talk more about this emerging trend.
Tell us what you are seeing in the industry regarding MSRs.
The industry has been witness to the exit or retrenching of several large and mid-sized banks with substantial servicing portfolios. For example, Bank of America is currently in the process of unwinding its large MSR position. Bank of America’s actions alone are creating a major shift in the market.
With some exceptions, the trend we are seeing has been the transfer of larger amounts of MSR transactions from regulated depository institutions to non-banks. The new non-depository institutions entering the mortgage servicing industry are attracted by the tremendous opportunity that participation in this business presents. Currently, MSRs are changing hands at higher levels than seen in years past, and we don’t see this trend slowing down any time soon.
How much servicing transfer volume is Ginnie Mae seeing?
For some years following the housing crisis, MSRs were largely illiquid except in the case of bankrupt or otherwise collapsed servicers. Even in 2011, Ginnie Mae only reported approximately $20 billion in transactions annually. However, in fiscal year (FY) 2012, Ginnie Mae’s MSR servicing transactions doubled to about $40 billion. In FY2013, we expect to see as much as $200 billion in MSR transactions, or 15 percent of our portfolio.
What, in your opinion, has led to this trend?
Financial institutions have different reasons for either investing in or moving out of the mortgage servicing business. For those institutions covered under Basel III, there is concern about the implications of the rule to be released by the Federal Reserve. The important issue is the treatment of MSRs and the extent to which regulated institutions will have to retain capital against those rights. Some institutions have made the strategic decision that mortgage servicing is no longer a part of their organization’s long-term strategy. For others, there is concern about the cost and the scrutiny associated with the increased regulation. On the investment side, some mortgage investors see servicing as a highly profitable business as MSR values are currently low.
What should industry participants be paying attention to?
We need to recognize what these large transfers of servicing mean for borrowers and for performance on delinquent loans. We also need to understand who is participating in these transfers. When a significant transaction occurs between a large bank and a new industry participant, we must pay attention to who is buying the servicing. Many of the non-depository institutions now entering this market have different capital structures than those who have typically participated. We are not always familiar with the institution or their operations.
When approving new servicers, it is equally important to determine the company’s motivation for entering this market. Is their intention to grow quickly? Do they see a unique opportunity in this space? In some cases, specialty companies like these non-depositories are more capable than larger institutions to manage these big portfolios. In fact, some have been established to do exactly that. We have seen individuals with distinct expertise in default management coming in to lead these companies, equipping them with the knowledge and proficiency that will make them successful in this area.
What is Ginnie Mae doing to assess these new servicers?
As the industry shifts and new players enter this market, Ginnie Mae has put in place a more intensive capability assessment review process. In addition to the traditional checklist already in place, Ginnie Mae is now conducting more qualitative assessments. These assessments include, among other things, a thorough review of the company’s financial health and staff expertise; an examination of its existing business partners; and an evaluation of its MSR strategy. If the assessment raises any concerns, Ginnie Mae is committed to addressing them with the applicants to develop a plan on how potential issues could be addressed.
How will Ginnie Mae ensure those new entrants are successful?
Once approved as a Ginnie Mae Issuer, we have tailored programs in place to aid in success. For example, Ginnie Mae has brought on additional employees who are equipped with mortgage servicing expertise. This robust team provides more proactive and hands-on engagement with new Issuers so that they have the appropriate training and education necessary to perform well.
Ginnie Mae is further developing its Issuer scorecard process to help monitor ongoing performance in the Ginnie Mae Issuer program. Going forward, it is Ginnie Mae’s intention that this scorecard will compile objective information on specific measures for all of our Issuers. It will provide each of them with a snapshot of how they are performing and where they rank among others in their respective peer group.
Any final thoughts on this emerging trend?
Ginnie Mae is doing its part to ensure that MSR transfers and the flow of capital are managed smoothly and efficiently. Industry regulators – particularly those in Washington, D.C., responsible for establishing guidelines for servicers – must make sensible decisions regarding policy. Such smart decision making, in turn, will help investors make appropriate investments that are good for the industry and sensible for the American taxpayer.