Servicing mortgage loans is a demanding business - even in the best economic climate. But when business conditions worsen and the next financial downpour hits, many more servicers will likely head for the door.
"The calm before the storm" is how many observers watching the mortgage servicing industry describe the current situation. It's quiet.
Facing changes in accounting rules, a slowdown in refinancings, a softening housing market and other factors, the conditions are ripe for major changes to remake the servicing landscape. Technology will have its own impact. Credit concerns will be another fallout, as companies servicing either their own or client portfolios exit unprofitable geographic or demographic markets.
"There are a number of servicers we are concerned about. There are several we're monitoring closely, and they're still suffering from the credit crunch of last October," says Kim Betancourt, director of servicer evaluation at Standard & Poor's in New York. "I anticipate there are a number that are not going to make it through the end of this year. They tend to be involved in subprime lending."
Betancourt would not identify the candidates, but says worrisome signals are clear. Companies are exiting like sailors warned to come ashore in the face of a thunderstorm. She points to DiTech Funding Corporation's acquisition by GMAC as a signal that the good times are waning.
"There are only so many acquirers to go around," Betancourt says. "DiTech had a huge ACH rate on their prepayments and 80 to 90 percent sign-ups for automatic payment. Other companies have escaped the coup de grace, but the [125 LTV loans] aren't as hot as they used to be. Rates are stable so they're not getting a lot of refi business, and there is more competition in the subprime market, where it used to be a regional or niche business."
Specifics of revisions to accounting rules affecting mortgage servicing issued by the Financial Accounting Standards Board (FASB) are expected later this year. That alone has opened the door to companies offering products and services to meet those requirements, says Tony Harney, senior vice president at Norwest Mortgage Corporation, Des Moines. But combine that change with bank mergers that have created megaportfolios with low retention rates, and you have the environment for the larger servicers to reach out to smaller companies.
Harney also heads Frederick, Maryland-based America's Servicing Corporation (ACS), which is a subservicer and a division of Norwest. Norwest has been a buyer of servicing in the past, Harney says. After about a year in operation, the new division has about 50,000 residential loans under contract from seven different clients, he says. His forecast calls for doubling that figure and quickly ramping up to compete against subservicing industry leader Dovenmuehle Mortgage, Inc., of Schaumburg, Illinois, which he estimates has a 30 percent market share.
"A year or 18 months ago, this was an 'all or nothing' business, where people didn't see the benefits of contracting out the servicing. It was hold it or sell it," Harney says. "Five of our seven clients are private-label clients, and we go to great lengths to make sure this is not generic customer service. All of them are residential prime loans, and we have two portfolios of subprime."
Harney says ASC will focus on banks and thrifts with assets of $500 million to $3 billion, where mortgages are run as a division within the institution, not as separate mortgage company.
"Typically, they haven't made investments in the technology platform, and we may be able to save them 15 to 20 percent over what they're paying now," Harney says. "Another category is independent mortgage companies that are looking to...