1. finance
2. personal finance
3. lending
4. home financing

Sunset Seminar
Mortgage Servicing: Current State
& Future Trends
May 6, 2015
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Mortgage Servicing: Current
State & Future Trends
Faith Schwartz, SVP, Government &
Public Affairs, CoreLogic
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Background & Current State
3
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Mortgage Servicing Regulatory Emphasis
The Lead Up
Early 2011
April of 2011

Prudential bank regulators form an interagency working group on the issue of
mortgage servicing: HUD, FHFA, Treasury

Federal Reserve, OCC, FDIC complete Consent Orders with the nation’s largest
servicers that resulted in corrective action
April 2011
  FHFA
FHFA
announces
announces
thethe
Servicing
Servicing
Alignment
Alignment
Initiative
Initiative
for for
GSE
GSE
to create
to create
consistent
consistent
procedures
procedures
for for
servicing
servicing
mortgages
mortgages
upon
upon
going
going
delinquent
delinquent
July 2011
  TheThe
CFPB
CFPB
joined
joined
thethe
interagency
interagency
working
working
group
group
January 2012

HAMP is extended for the first time through 2013 and later through 2015
February 2012

DOJ and 49 State AG reach a $25 billion settlement with the five largest servicers
April 2012

The CFPB releases a regulatory roadmap of the mortgage servicing industry
4
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Additional Rulemakings
A Number of Rules Become Effective
(effective 1/10/14)




Lenders must assess a borrower’s reasonable ability to repay a mortgage
“Qualified mortgages” meet the new ability to repay standard
Investors share in liability
Impact of regulation still being assessed
Qualified
Residential
Mortgage (QRM)


Aligned QRM credit risk retention definition with CFPB QM definition
Allows for government exemption from 5 percent risk retention

Restrictions on compensation to MLO employees, including on bonus
plans
MLO registration and oversight
Ability to Repay
and Qualified
Mortgage
Final
Mortgage Loan
Officer Comp
(effective 1/10/14)
Servicing
Standards
(effective 1/10/14)



Integrated
Mortgage
Disclosures

(effective Aug. 2015)

Home Mortgage
Disclosure Act

(proposal stage)


New series of requirements relating to how loans are serviced that focus
on requiring increased high-touch service and explicit timelines
Includes: ‘error resolution procedures;’ ‘continuity of contact;’ ‘request for
information;’ and ‘information management procedures.’
Replacement of Good Faith Estimate under TILA and RESPA with new
loan estimate
Replace HUD-1 disclosure at closing with new disclosure and creditors
responsible for content
Increased frequency of disclosures and earlier in process
CFPB has proposed additional fields it intends to capture for reporting
including quarterly reporting proposed for large institutions
Outlined proposal includes a number of data fields beyond the statutory
requirements in the DFA
5
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Servicing Timelines Remain Elevated
Source: CoreLogic, True Standings
6
©2015 CoreLogic, Inc. All rights reserved. Proprietary and Confidential.
Phoenix
CAPITAL
The Mortgage Servicing
Rights Market
| Current State and Future Trends|
Stephen Fleming, Senior Vice President
Urban Institute & CoreLogic
May 6, 2015
Washington, DC
Private & Confidential
Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070 | www.phnxcap.com
MSR Major Revenue Components
 Service fee – largest component typically of income and is represented in terms of
bps times the unpaid principal balance
 Self amortizes as loan pays down, service fee declines with the UPB of the loan
 An avg balance of $300K generates $750 a year, while a avg of $100K
generates $250 a year based on a 25 bps servicing strip
 Servicer is paid only if the borrower makes a payment for FNMA, FHLMC and
GNMAs
 Ancillary and Late Fee Income – typically expressed in term of dollars per loan
 Float earnings on payments, payoffs and escrowed – servicer needs to have the
ability to earn float on these funds (typically banks) and depending on overall level
of interest rates, can have material impact to the valuation
 Payment and payoff float is driven by remittance type
 Escrows are impacted on timing of remittance of funds and whether interest
on escrow (IOE) must be paid
 Tax remittance is driven at the state level for valuations
 IOE assumption is applied at the state level
Private & Confidential
8
MSR Major Expense Components
 Cost to service – typically layered in on several factors including
 Investor
 Conventional
 FHV / VA
 Product type
 Fixed versus ARM
 Geography (especially for foreclosure costs)
 Judicial versus non judicial states
 Delinquency status
 Cost are increased for each level of delinquency
 Unreimbursed foreclosure costs
 Driven by investor
 Cost of Advances made by servicer on behalf of delinquent borrowers
 Some expenses may be netted against offsetting income items such as interest on
escrow and prepaid interest lost
Private & Confidential
9
MSR Asset Components – Summary
MSR asset value is comprised of many layered, moving pieces:
Revenues
Expenses
•Service fee revenue
•Servicing costs
•Escrow float earnings
•Additional costs for
delinquent loans and
foreclosures
•P&I and payoff float
earnings
•Ancillary income (e.g. late
fees, modification income,
optional insurance, etc.)
Prepayments
•Voluntary payoffs –
Refinances
•Involuntary payoffs –
Foreclosures
Private & Confidential
•Advances on delinquent
P&I and escrow payments
•Interest owed on escrow
accounts (i.e., for CA, CT,
MA, ME, NY, OR, RI, UT, VT
and WI)
*Prepayment speeds are the key driver behind
servicing values (on performing or new
production):
• The longer a performing MSR is held in the
portfolio, the more revenue will be received
• As interest rates rise, prepayment speeds will
slow down, that increases the duration and
resulting value of the MSR
• Conversely, as interest rates drop, prepayment
speeds will rise, which will decrease the life and
the value of the MSR
•Interest owed on early
payoffs (unique to
scheduled / scheduled
products)
10
MSR Market Executive Overview
 Looking back, MSR trading levels hit a bottom in the 2nd half of 2012 (see following
graph slide), with only 2 to 3 potential flow buyers in the market
 2014 pricing only furthered the 2013 pronounced strengthening trend
 2015 has been very … interesting:
o Liquidity is present but has become more specific
o Supply and demand are more dependent on structure (flow vs bulk vs IO,
etc), counterparty risk, investor profile, deal size, and loan-level attributes
• Ocwen, large direct deals, etc.
o Jan rates slid precipitously; Feb rates behaved better for MSRs; Mar rates
saw-toothed sideways/downwards; Apr rates plateau’d  VOLATILITY
o Values have become more tenuous, with buyers focusing intently on:
• Heightened rate volatility
• Flat yield curve
o Translating into a wider dispersion of bid levels across a wide pool of demand
o Pricing analysis is getting more and more granular
… And let’s see what the rest of the 2nd, 3rd and 4th quarters bring!...
Private & Confidential
11
Historical MSR Pricing - Conventional
Private & Confidential
12
Historical MSR Pricing - Government
Private & Confidential
13
Bulk versus Flow Pricing
Bulk Pricing
 Driven by a number of factor including:
 Level of interest rate in portfolio versus
current mortgage rates
 Loan level characteristics
 FICO
 LTV
 Geography
 Historical performance including payment
and prepayment history
Flow Pricing
 Driven by the expectation of rates in
addition to the expected loan
characteristics
 Viewed as a long term relationship and
partnership (versus a transaction)
 Complex pricing grids are produced by the
MSR buyers
 Strength of counterparty to stand behind
reps and warrants
 Repurchase history is critical
Private & Confidential
14
Early 2015 MSR Observations
A more balanced MSR market is expected in 2015, as the servicing sales supply may
outpace the buy side demand
 Ocwen portfolios are likely to dominate the market during the first half of
2015; however, it is unclear outside of Nationstar who will purchase them
(bank buyer(s) for other portions?)
 The initial drop in rates in January have created a miniature refinance
opportunity
 Large bulks (over $1 billion in UPB) and larger flows (over $100 million a month
in delivers) receive the best pricing and greatest number of bids
 Buyers are becoming more selective in bidding and unlike 2013 and the first
nine months of 2014, don’t bid on every MSR portfolio  making the success
rate (closed deals) lower in the first few months of 2015 compared to 2014
 MSR Financing continues to be an increasing trend (also for independents)
Private & Confidential
15
2015 MSR Outlook
As we discussed earlier, the MSR market continues to shift; however, the volume of
deals placed in the market (and done directly) remains elevated:
 General shift towards equilibrium (buy-side bias?)
 Despite a drop in rates in January, the refinance wave is likely to be short-lived
and pressure to execute servicing trades will continue to increase
 Buyers that have reached critical mass will bid less aggressively (except for the
most pristine packages)
 Buyers will more closely evaluate forecasted vs actual performance
(e.g. anticipated returns vs actual returns)
 MSR buyers that did not reach critical mass are likely to exit the servicing
business over the next 12 months
 It appears more downward pressure on value exists than upward pressure, and
depending on the clearing price, some MSR sellers are likely to be disappointed
with their execution
Private & Confidential
16
Key Contact Information:
Stephen Fleming
Senior Vice President
(303) 539-7249
sfleming@phnxcap.com
Private & Confidential
Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070 | www.phnxcap.com
Appendix: The Phoenix Family
The Phoenix Family of Companies continues to be the industry leading MSR
advisory firm as it offers comprehensive solutions for its client base:
Phoenix Capital, Inc.
After trading approximately $500 billion in MSRs in 2013, Phoenix has successfully traded over $100
billion in UPB in YTD 2014 representing nearly 50 distinct bulk and flow MSR transactions of Fannie
Mae, Freddie Mac, Ginnie Mae and Private Investor MSR’s
Appendix: Phoenix Family of Companies Update
Phoenix Analytic Services, Inc.
Provides MSR valuations and analytics including customized economic valuations and customized SRP
grids in addition to full MSR Accounting outsourcing
Phoenix Collateral Advisors, LLC.
With the addition of John Burnett is the Fall of 2013, provides servicer surveillance and advisory
services for both large and small servicers and monitoring sub-servicers
Phoenix Asset Management, LLC
Provide REO, Short Sales and component outsourcing for its clients
Phoenix Whole Loan Solutions (a/k/a) Steel Mountain Loan Trading, LLC
Provide whole loan trading solutions for its clients
Private & Confidential
18
Mortgage Servicing:
Current State and Future Trends
Alys Cohen
©National Consumer Law Center
The Big Picture
• Are communities still facing fallout from the housing crisis?
• Are servicer incentives aligned with homeowners and
investors?
• Can streamlined rules aid both homeowners and industry?
• Where do homeowners stand when servicing rights are
transferred?
• Why the delays in foreclosure resolutions?
20
©National Consumer Law Center
www.nclc.org
The NCLC Survey
• Nationwide survey from February 24 to
March 3, 2015, of more than 100 attorneys
and housing counselors representing
homeowners.
• Results show urgent need for further
reforms.
21
©National Consumer Law Center
www.nclc.org
Key Findings
• Enhanced protections needed to:
– Help successors in interest avoid foreclosure;
– Close the “complete application” loopholes;
and
– Allow subsequent applications for new
hardship.
22
©National Consumer Law Center
www.nclc.org
Challenges Faced by Successors
• Widows, orphans, other heirs
• Homeowners but not on loan
• Need loan information
• May need loan modification to keep home
23
©National Consumer Law Center
www.nclc.org
Graph 1: Which of the following have you experienced when trying to
get the servicer to acknowledge your client as a successor? (Check
all that apply.)
24
Graph 2: Where you have been contacted by a successor who needs
a loan modification and is facing the risk of foreclosure, how did the
servicer respond?
25
Graph 3: Have you been contacted by a joint owner of the house who
is on the mortgage/deed of trust but not on the note, where your client
is a co-owner and there has been no recent transfer of the house? This
may come up in cases of separation, abandonment, domestic violence,
unmarried partners, etc.
26
Graph 4: If yes, did you have difficulty trying to get the servicer to
communicate with your client?
27
Graph 5: If yes, did you have difficulty getting the servicer to let your
client apply for a loan modification?
28
Roadblocks to Completing
Applications
• “Complete application” is required before
“dual tracking” protections apply.
• Increased fees, interest accrual,
unnecessary foreclosures.
• “Initial package” standard would
incentivize more efficient reviews.
29
©National Consumer Law Center
www.nclc.org
Graph 6: In the past year, how often have you had trouble with
servicers requesting some documents, then requesting others
(piecemeal)?
30
Graph 7: In the past year, how often have you had trouble with
servicers asking for the same documents over and over again?
31
Graph 8: How often does a servicer ask for additional documents
after your client has submitted everything the servicer requested in the
5-day letter?
32
Graph 9: How often do servicers initiate foreclosure after you have
been told (for the first time) that the application is complete (or your
client has provided everything the servicer requested in the 5-day
letter) but the servicer then requested additional or duplicative
information?
33
Graph 10: On average, how long is it taking for your clients to get their
loan modifications reviewed, from start to finish?
34
Homeowners with Subsequent
Hardships
• CFPB rules only apply to first complete
application. Even if you didn’t qualify.
• Yet, homeowners often face a change in
circumstances (new hardship).
– Death of a spouse, job loss, medical debt
• Servicers often evaluate subsequent
applications (often are required to do so).
35
©National Consumer Law Center
www.nclc.org
Graph 11: How often in the cases you are handling has a servicer
reviewed an application from your client (where one was submitted)
even though a decision was made on an earlier complete application
submitted after 1/10/14? (In other words, how often are you
representing people with "subsequent applications," and servicer does
not object to reviewing the application?)
36
What’s next?
• Tighten regulatory loopholes
• Reform servicer compensation
• Ensure broad access to credit and fair
servicing
• Establish a post-HAMP plan
37
©National Consumer Law Center
www.nclc.org
Mortgage Servicing: Current State and
Future Trends
Outside Counsel's View
Presented by
Jeffrey P. Naimon
Partner
BuckleySandler LLP
38
Biggest regulatory issues
• Compliance with new CFPB servicing rules
– Will the new rigidified requirements over what was traditionally
an informal process result in better outcomes for borrowers ,
servicers or investors?
– Intense scrutiny by CFPB examination teams
• Compliance with mortgage servicing transfer bulletin
• Increasing applicability of FDCPA requirements and
prohibitions on all servicing activities
• Additional foreclosure protections and "homeowner bill
of rights" laws creating more legal traps
• Vacant property/REO requirements
39
Biggest regulatory issues - Continued
• Regulatory criticism of legacy systems, ongoing use of
multiple systems, "inadequate" staffing
• What is an appropriate error rate
– Does everything have to be perfect all the time?
– Does anyone want to pay for what perfection (or closer to
perfection) costs?
40
Questions
Jeffrey P. Naimon
Partner
BuckleySandler LLP
202.349.8030
jnaimon@buckleysandler.com
41
Mortgage Servicing: Current State and
Future Trends
Laurie Goodman, Director
Housing Finance Policy Center
Urban Institute
Sunset Seminar V
May 6, 2015
Mortgage servicing issues
• Servicing costs are high
• Timelines are very long
• Uncertainty and mixed messages regarding the treatment of delinquent
borrowers
- Basic attitude differences between CFPB and GSEs/FHA
- GSE compensatory fees
- FHA first legal deadline and other issues
• Servicing is an important contributor to tight credit
43
Servicing costs per loan are way up, productivity down
Performing
$ per loan
Non-performing
2,500
2,000
1,500
1,000
500
0
# loans serviced
per servicing
employee
2008
2009
2010
2011
2012
2013
1638
1101
1128
893
766
647
2014
706
Sources: Mortgage Bankers Association and Urban Institute calculations.
44
REO timelines by date of liquidation
Judicial States
Months
45
All States
Nonjudicial States
40
35
30
25
20
15
10
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Larry Cordell and Lauren Lambie-Hanson, “A Cost-Benefit Analysis of Judicial Foreclosure Delay and a Preliminary Look at New Mortgage Servicing
Rules,” Federal Reserve Bank of Philadelphia, March 2015.
45
For Freddie Mac loans experiencing a credit event…
Current or
prepaid (%)
Already
liquidated (%)
Not current, not
liquidated (%)
23.1
45.5
31.3
NY, NJ, CT, FL
23.6
37.8
38.6
Other judicial
22.7
51.8
25.6
Non-judicial
21.7
60.2
18.0
All
22.3
53.8
23.8
State
Judicial
Source: Urban Institute calculations from Freddie Mac data.
46
Servicing a non-performing FHA loan– an example
Here is a timeline in which both the borrower and servicer comply with CFPB guidelines:
Foreclosure attorney
initiates foreclosure
(220 days)
Servicer responds to loss
mitigation application
(146 days)
Earliest allowable initiation
of foreclosure process
(121 days)
First missed
payment (0 days)
Borrower submits
complete loss
mitigation application
(116 days)
Servicer evaluates and
denies appeal, refers
loan to foreclosure
(190 days)
Borrower appeals
servicer response
(160 days)
The servicer misses the FHA’s 210 day deadline to initiate foreclosure. For a loan with an
unpaid principal balance (UPB) of $150,000, the penalty would be roughly $7,500, or 5% of
the loan.
$150,000 (UPB) x .025 (debenture rate) x 2 (years to convey property to HUD) = $7,500
47
Credit scores much tighter…
FICO Score at Origination
90th percentile
Mean
Median
10th percentile
850
800
750
700
650
600
550
500
2001
2003
2005
2007
2009
2011
2013
2015
Source: Urban Institute calculations from CoreLogic Servicing data.
48
…though LTV and DTI less so
Combined LTV at Origination
110
90th percentile
Mean
Median
10th percentile
100
90
80
70
60
50
40
30
2001
2003
2005
2007
2009
2011
2013
2015
Debt-to-income Ratio at Origination
60
90th percentile
Mean
Median
10th percentile
50
40
30
20
10
0
2001
2003
2005
2007
Source: Urban Institute calculations from CoreLogic Servicing data.
2009
2011
2013
2015
49
Credit Availability Index shows overall tightness
Percent
18
16
14
Product risk
12
10
8
6
Total without risky products
4
2
0
98
99
00
01
02
03
Sources: CoreLogic, HMDA and Urban Institute calculations.
04
05
06
07
08
09
10
11
12
13
50
14
Sunset Seminar
Mortgage Servicing: Current State
& Future Trends
Alys Cohen, attorney, National Consumer Law Center
Michael Drayne, senior vice president, Ginnie Mae
Stephen B. Fleming, senior vice president of Phoenix Capital, Inc.
Laurie Goodman, director, Housing Finance Policy Center, Urban
Institute
 Jeffrey Naimon, partner, BuckleySandler LLP
 Faith Schwartz, senior vice president of government and public
affairs, CoreLogic




May 6, 2015