This week, MortgageOrb connected with Richard Koch, a director in the structured finance ratings group at Standard & Poor's (S&P), to discuss current trends in subprime mortgage servicing. Koch and S&P are uniquely positioned in the market, maintaining close contact with subprime servicers and assessing their performance as part of S&P's servicer evaluation program.
Subprime is the arena where today's most lively servicing discussions take place. However, Koch's comments might be best considered in a wider context – one extending beyond Wall Street and subprime servicing.
Q: I've noticed that some servicers have managed to maintain admirably high S&P servicer ratings during a time of unprecedented market strain. What components of a servicer's operations must be performing well to receive S&P's affirmation?
Koch: Considering everything that's going on in the market, we're looking at a number of factors. If anything, when times get tough, we don't lower the bar. I think we raise it.
Especially with servicers that have large adjustable-rate mortgage (ARM) portfolios with a high quantity of option ARMs, we're looking at how proactive they can be. Are they identifying the portfolio risk? Have they gone into their portfolio and stratified it based on the upcoming resets – this year, as well as in 2008, 2009, 2010? Then, what are they doing about it?
What we've seen with some servicers is that they're projecting the amount of the payment increase. If they think someone's payment is going to change 15% or 20%, they're trying to get out in front of that person months in advance.
But I haven't seen all [of the servicers] being able to cut the portfolio based on all the factors we'd like to see. From a technology standpoint – or a tracking and management standpoint – there are some gaps.
Q: On the other side of the coin, where have some servicers gone sour – operationally – in the current climate and, thus, slipped in S&P servicer ratings?
Koch: One of the things that concerns us is capacity. We've been collecting a lot of data on how servicers are grappling with that – the need to hire more qualified people, especially in areas like loss mitigation, collections and foreclosure. I know that they're moving a lot of people from the front end to loss mitigation, to re-underwrite these loans and do loan modifications.
Another issue that concerns us is what's going on in the bankruptcy courts and in foreclosures. Judges are rejecting both bankruptcy proofs of claim, as well as foreclosures, because of a lack of thorough paperwork on behalf of the vendors that are representing the servicers.
All the pressures that are out there on servicers, both from a regulatory and political standpoint, to modify loans and to do anything to prevent a loan from going to foreclosure – that has filtered down to the bench. Some servicers really aren't managing their vendors well. We're beginning to hear a lot of that from the judges around the country.
Q: What kind of support are Wall Street investors providing to help subprime servicers effectively and efficiently administer high volumes of delinquent loans?
Koch: In general, what I've heard from a lot of servicers is that they're in virtually daily contact with investors. There is a lot of volume going back and forth. On a preliminary, anecdotal basis, the relationships seem good, and the cooperation between the parties seems good. We're not seeing, at least at this point, a lot of rejections.
Some servicers have been delegated authority to do loan modifications and pre-packaged workouts, and they're approaching borrowers with those en masse. There's a lot going on in the industry – a lot of different approaches – to see what works.
Q: How do you see the subprime servicing market playing out in the coming months and years?
Koch: You're probably bound to see a bit more fallout from the credit crunch, on a financial basis. There are probably a few more players that, potentially, might not survive or be acquired.
But obviously, resets and loan modifications are the big issues that we're going to be living with for the next 24 to 36 months. This is something that's really going to test a servicer's ability to ramp up with capacity and do what they're supposed to do best: problem-solving. Whether they can do that and still be profitable is another issue.