Servicing Management
December 2005
Submitted by: Donna Schares, Client Integration Manager, GMAC Mortgage Corporation
Introduction
Simply put, interim servicing is the process of servicing loans that are held in a portfolio and awaiting sale; however, interim servicing is anything but simple. A recent rise in private-label MBS securitization and a market shift fueled by an increase in non-conforming products have combined to create numerous loan exit options. This, in turn, has created a definitive need for short-term loan servicing. This article will attempt to explain exactly how interim servicing works? the different types of engagements and the keys to successful interim servicing? as well as the advantages of both interim servicing and interim subservicing.
Interim Servicing Engagements
Although there are numerous types of interim servicing, we have created two broad types to facilitate explanation: interim servicing for originators and interim servicing for conduits (i.e.: Wall Street conduits). In the former, organizations originate loans which are then interim serviced, typically to aggregate larger packages. With conduit interim servicing, an organization gathers loans from different third-party sources; these loans are interim serviced prior to securitization and eventual sale. In either situation, organizations may perform interim servicing themselves, but they are increasingly turning to subservicers to do so on their behalf.
Conduit Interim Servicing
In conduit interim servicing, conduits control the loan transaction in three areas: buying, securitizing and selling. In turn, many conduits have turned to subservicers to provide interim servicing. With an interim subservicing engagement, conduits buy loans from third-party originators that range from small, independent operations, to very large and sophisticated sellers. The loans, purchased servicing-released, are then transferred to the subservicer. With the loans aggregated at the subservicer, pools are created for securitization or sale.
The conduits perform quick securitizations; therefore, timing is of the utmost importance because all data needs to be ready. To ensure successful securitization execution, key pieces of loan information must be boarded into the system prior to month’s end, before security payments are scheduled. Subservicers performing interim servicing work hard to get all the necessary data and verify accuracy and timeliness of this information.
In addition, multiple securities of various types (e.g. Alt-A, ARMs, Closed-End Seconds and HELOCs) are closed each month. With multiple securities, not only is there a lot of communication between all parties, there is also an array of documents to coordinate. Reviewing all the documents in time for securitization close requires focus by all parties to the agreement.
Even with all the varied securities typically closed each month, the primary challenge of this structure is in the front-end of the process? managing loan transfers from multiple sellers. The reconciliation of balances and close monitoring of data integrity, timing and communication all become pertinent factors with this kind of interim servicing arrangement, ensuring the data is of good quality and reducing any future headaches. To that end, it is necessary to work closely with each seller and seek to continuously improve interaction.
Oftentimes, a due diligence provider is also involved to review underwriting, data integrity and documentation. This due diligence provider becomes one more party being managed by the conduit. Managing multiple parties to ensure the loans are boarded quickly for securitization and/or sale can be quite complicated. In turn, conduits must work closely with all parties in order to avoid any negative repercussions.
Originator Interim Servicing
Originator interim servicing has become increasingly popular in today’s servicing market. Numerous benefits of originator interim servicing exist, including the flexibility to enter new markets and offer new or recycled product types, such as Hybrid ARMs, Option ARMs and Interest-Only ARMS? loans that represent a high percentage of today’s marketplace.
Originator interim servicing widens execution strategies in terms of who can buy loans and how they can be sold. For example, a medium-sized player with no servicing operation is forced to sell loan by loan, entering into a negotiated-price contract with one company only. With interim servicing, organizations can bulk loans and sell them as a larger package or even securitize them and sell them later.
Many organizations are using subservicers to handle the load of interim servicing. Subservicers with full servicing capabilities across multiple products are equipped to handle interim servicing’s inherent challenges. Subservicing allows loan originators to focus on what they do best— originating loans? as opposed to handling the often messy back office servicing. Additionally, it can be faster for an organization to use a subservicer vs. build their own servicing operation from the ground up. In essence, outsourcing interim servicing opens up a whole new world of opportunity for the originator, who can easily make the switch to a retained servicing environment and hold on to a number of loans all at once.
Also opening up execution strategies is the ability to sell packages to other organizations using the same subservicer. No real transfer of loans occurs, thus reducing the possible number of errors. Using an interim subservicer in this scenario is also quicker and cheaper than trying to interim service the loans in-house, as there are no transfer costs and less information shuffle.
Related to information shuffle, of primary concern to originators is the prevention of customer confusion, the goal being to minimize disruption as much as possible. An effective way to overcome this challenge is to use private-label interim subservicing.
Interim Servicing Products
As alternative delivery methods have become more popular, there has been greater demand for interim servicing within the mortgage origination market. Non-agency MBS activity has accounted for much of this demand. According to recent statistics compiled by Inside MBS & ABS, year-to-date non-agency MBS activity is $541.52 billion, the most ever produced in six months. This figure has put the industry well on pace for $1 trillion or more in total non-agency MBS issuance by the end of 2005.
Two popular non-agency mortgage products that have been traded in the non-agency secondary market and thus are often interim serviced are Alt-A and subprime loans. In recent years, the mortgage market has seen a significant increase in the origination of both product types. According to figures compiled by National Mortgage News, subprime and Alt-A funders originated a record amount of loans in 2004, while conventional production declined. Year-to-date issues of subprime MBS issuance jumped up to $219.37 billion in 2005, up 44.4 percent from last year. According to Inside MBS & ABS, the Alt-A market is growing even faster, and year-to-date volume is $141.27 billion, more than double the $63.03 billion of Alt-A MBS issued during the first half of 2004.
The popularity of alternative mortgage products is driving a significant increase in interim servicing, provided the subservicer has developed this capacity. These products include Interest-only (IO), Payment-Option and Hybrid ARMS, as well as HELOCs. Most interest-only loans are hybrid adjustable rate mortgages, per Inside MBS & ABS. The volume of IO fixed-rate mortgages also appears to be growing. During the second quarter of 2005, for example, $87.2 billion of IO mortgages were securitized in the non-agency MBS market. On a year-to-date basis, ARMs accounted for 67.7 percent of total non-agency MBS issuance in the first half of 2005, up from 62.2 percent for all of last year.
Using a subservicer allows originators to begin originating these popular products with significantly less servicing development and roll-out work. Well-rounded subservicers have been servicing these varied products for years and can easily accept these loans to service.
Keys to Interim Servicing
There are several keys to successful interim servicing, including accurate and timely communication regarding upcoming transfers; clear transfer instructions; managing customer impact; ensuring correct document management functions are performed; issuing HELOC checks, protecting the integrity of the data, and reconciling the loans.
In interim subservicing, the primary communication between a servicer and a client revolves around the transfer in and transfer out of a loan and timely boarding to allow for quick securitizations. It is fundamental and critical to a successful interim servicing relationship for the servicer to define requirements and obtain clear direction from the loan’s originator or their servicer. The client must make several important decisions upfront about interim servicing, such as whether to place tax and flood contracts immediately on the loan, if files should be shipped and if the loans should be private labeled.
Welcome calls can be employed to mitigate customer confusion. During this “soft” call, a subservicer calls the customer to indicate what their current due date is. He or she provides an introduction, re-states their mailing address and attempts to get a payment if the account is delinquent.
When interim servicing HELOCs, there may be disruption to the customer in regard to checkbooks, as the process of issuing checkbooks is difficult to manage. A key to offsetting this disruption is to employ an interim subservicer who is the same subservicer used by the companies to whom the loans will be sold. In this scenario, the borrower remains with the subservicer and the checkbook that was issued can continue to be used? the changes are all made in the background.
Finally, of utmost importance in all interim servicing situations is efficient communication, as there is often a great risk for error. As mentioned earlier, managing purchase and deliveries from multiple sellers, as well as working with due diligence providers, requires the utmost expertise in communication to ensure accuracy and success. At the outset, conference calls are held and site visits are conduced to document processes and procedures and perform testing. As the relationships and processes mature, the calls become less frequent and are routinized.
Conclusion
A company experienced at managing the multiple issues surrounding conduit and originator interim servicing? whether done internally or by a subservicer? can help make the process a successful one. As companies grow, their needs may change. They may choose to invest in servicing rights and focus on building a balanced business model, or explore that strategy as a best execution for their business. Some firms may decide to retain loans for their own account and build a loan portfolio. They may even want to enter the securitization field. A qualified interim servicer is one who can easily transition their role into that of a traditional subservicer in these scenarios. An interim subservicer can be of great value in helping clients achieve their goals and improve their profitability in today’s competitive mortgage climate.