Some serious issues have arisen from conflicts created by the dual role that mortgage servicers play - where in several cases, the servicer is also the seller on a securitization deal.
One issue that investors are increasingly looking into is the modifications made on first-lien mortgages to keep intact second-lien mortgages serviced by the selling bank. Grais & Ellsworth hosted a conference called Robo-signers and Other Servicing Failures: Protecting the Rights of RMBS Investors. Panelists discussed the conflicts of interests that can happen when a seller bank also services the loan.
As of the second quarter, the four largest banks - JPMorgan Chase, Wells Fargo, Citigroup and Bank of America - own 56.2% of one to four family loan servicing industry, said Laurie Goodman, senior managing director at Amherst Securities Group. Goodman was among the speakers leading the discussion at the conference. She said that these banks also own $433 billion of the roughly of $1 trillion HELOC and second-lien markets, essentially owning about 43% of the outstanding.
The same banks own a relatively smaller proportion of the first liens and a good number of these are found in private label securitizations while the second liens are in bank portfolios. This creates a huge conflict of interest, Goodman said.
"The biggest omission of the Dodd- Frank Act was the inability to deal with these second mortgages," she said. "There is a strong notion that a qualified mortgage will be a good loan that can be securitized with no risk retention. The question is, what is a good loan when a borrower can go out and re-lever tomorrow?"
In private-label securitizations, 51% of first mortgages have a second lien on them. Goodman said that the banks seem to be telling borrowers to keep paying on the second lien while they modify the first lien, with a possible modification on the second lien later. Modifications on second-lien mortgages, she said, are optional. "There is no question that the very presence of a second lien has a huge impact in the performance of a first lien," she said.
The influence is clear when you look at the delinquency status of first liens versus second liens. According to data from the Federal Deposit Insurance Corp., 2.8% of first liens in bank portfolios are 30- to 89-days delinquent, while it is 1.2% for second liens.
Goodman compared second-lien delinquency rates held in bank portfolios with the relatively small number of second liens held in securitizations. Of the $27 billion dollars of second liens held in private-label securitizations with FICOs greater than 720, 5% were 30- to 89-days delinquent; for first liens the figure was 3.5%.
"Performance of first liens is about 25% worse than those held in bank portfolios, but performance of second liens held in private-label deals is about 400% worse," Goodman said. "This points to differential standards of managing second liens in securitizations versus second liens in bank portfolio. It's clear they are doing all they can to get the first lien modified in order to preserve the interest in the second lien, and that is just a huge conflict of interest."
Another huge conflict of interest is the put-back issue because, in many cases, the originator and investor who is putting back the mortgage is in fact also the servicer. Goodman estimated that the losses in private-label securitization will be around $714 billion out of the original $2.9 trillion in securitization.
"We assumed that about 60% of the loans paid off are currently nonperforming and about 40% of current re-performing or always performing loans you can attempt to put- back because there is some form of violation," she said. "We assumed a 25% success rate on expected put-back, thus 15% for paid off nonperforming loans and 10% for the always performing loans."
Goodman estimated that put-backs can probably reach $97 billion, a number that will ultimately be determined by how quickly investors can align themselves to achieve a critical mass of voting rights. Additionally, the PSAs in some deals also make it difficult to do put-backs. In some cases, not all of the responsible parties are going to still be in business when a put-back can be done, which will also put a cap on the number of put-backs.
Goodman said that, in certain cases, borrowers who never made a single payment after the loan was securitized would have made a ideal candidates for put-backs. Of those, 3% are still outstanding, 37% have been repurchased at par and 59% of loans have been liquidated with a 63% average loss to the investor.
"There is a lot of rep and warranty violations, even more as you investigate the loan file," she said. "But it's a loan-by-loan fight, albeit one that can very profitable."
- Nora Colomer