PERSON OF THE WEEK: Nancy Barthel is the senior vice president of operational risk for Chicago-based Fay Servicing, a special servicer and mortgage originator that manages residential mortgages for banking institutions and alternative real estate investors. MortgageOrb recently interviewed Barthel to learn more about Fay Servicing's new private-label securities (PLS) business, as well as what servicers can do to help ensure seamless transfer of mortgage servicing rights (MSRs) for loans in distress.
Q: The term "special servicer" is often associated with distressed or delinquent loans. How has the role of the special servicer evolved as we move farther away from the housing crisis?
Barthel: Prior to the financial crisis, most servicers specialized in either processing payments or liquidating properties. During that time, many prime servicers were forced to essentially become special servicers and manage more defaulted loans than they were built to handle.
As the housing market continues to normalize, the servicing industry, as a whole, is dealing with fewer delinquent loans and more re-performing or ‘at-risk loans,’ as delinquent loans are either modified or liquidated. However, traditional banks, even those with large servicing platforms, are not eager to manage re-performers or nonperformers for a variety of reasons, most of which are related to the growing costs and risks associated with managing distressed residential loans. They are sending any kind of troubled loans to the non-bank special servicers either in MSR or whole loan form.
In today's environment, there is a tremendous amount of investment in regulatory infrastructure just to maintain the minimum servicing standards that many banks are required to have in place for their distressed servicing portfolios. Investors in troubled loans and MSRs are recognizing that special servicers that can connect with the borrowers and avoid foreclosures have a distinct competitive advantage within that niche sector.
The ability to build a relationship with a borrower and leverage it to maximize loan value is something servicers were not focused on prior to the crisis. Given today's environment, that skill is absolutely needed to obtain the best outcome for the borrower and owner of the asset.Â Â
Q: What factors have encouraged organizations, such as Fay Servicing, to move into the PLS market?
Barthel: In the new issue PLS market, there are really two segments: The first is legacy loan securitizations, and the second is new origination securitizations. Legacy PLS deals have picked up because prices of nonperforming loans (NPLs) and re-performing loans (RPLs) have increased, lowering yields, and the asset owners have securitized assets to gain leverage.
Bond buyers have become more comfortable with the collateral and deal structures, part of which is represented by the servicing component. Most servicers on PLS transactions have respectable track records in managing RPLs or NPLs in a post-crisis environment. These deals provide an attractive leverage option for the buyers, so given the supply we have seen and expect to see for the next couple of years, we feel it is a growth business that was a natural extension of our whole-loan servicing platform.
Regarding new origination PLS, jumbo has been the only game in town since the crisis but we think near-prime deals are coming. Both businesses will be a nice fit for us for slightly different reasons.
Regarding jumbos, issuers are looking for premium attention when it comes to addressing concerns of their originators, but they also want the first line of defense to be a strong one when a high-balance loan goes delinquent.
Regarding near-prime loans, the market of creditworthy borrowers is much larger than the population that can currently qualify for loans.
Over time, private capital will come back and risk-based pricing will come with it. As this occurs, we feel this trend matches up nicely with our platform because these near-prime lending strategies will directly benefit from a more integrated and high-touch servicing approach.Â
Q: The market has remained hesitant to bring near-prime PLS deals so far. What issues must be addressed in order to increase investor confidence and bring back private capital to that sector?
Barthel: From a credit underwriting perspective, we need to bring back focus on the under-appreciated value of residual income as opposed to debt-to-income ratios. Improved transparency and alignment of interests within the securitization process and structure are critical, and that is starting to happen. Higher interest rates will help the economics of the deals; there just isn't much to work with, where we are today. And we will likely need to see some solid performance in new origination near-prime whole loan portfolios before all the transaction stakeholders line up to create a vibrant near-prime PLS market. So, this is clearly not a first-quarter-of-2015 event, but we think it is coming sooner than most do.Â
Q: The Consumer Financial Protection Bureau is looking for additional protections for struggling borrowers during MSR transfers. Specifically, it is asking servicers that receive transfers to ensure that loss mitigation requirements are ‘met within the same time frames’ that applied to the transferring servicer. Is it possible for servicers to create a ‘seamless’ process wherein timelines are not disrupted when loans are transferred?
Barthel: Yes, it is very possible to create a seamless process and actually improve the borrower experience through servicing transfers. Historically, it was difficult to access full loan file documentation from prior servicers. Now that servicers are working together to ensure a smoother servicing transfer process, pending loss mitigation activity is a major focus.
Servicer loan management strategies can now be much more proactive rather than reactive in nature. For example, our single point of contact account managers that handle loans experiencing loss mitigation activity can do extensive research on things like recent trial modifications, adjustable-rate mortgage resets and changes in escrow payments before the first call is made to the borrower. It is that early ‘knowledge transfer’ that is helping to ensure that the borrower is not negatively impacted through the process while guaranteeing that timelines are maintained.
The borrower may even benefit from refreshing his or her updated financial picture with a new servicer in light of any change in circumstance. It is critical that the new servicer has the bandwidth and infrastructure to both digest the information and effectively leverage it as it reaches out to the borrowers in a timely manner.