Loan modifications aren't just important to the revival of the U.S. mortgage market. The U.K. too recognizes the importance of keeping borrowers in their homes and has devised several initiatives to push loan modifications through, although with less success.
"The U.K. isn't thinking about loan modifications on the same level because it doesn't have to," Culhane said. "Part of the problem behind why more servicers just don't take the initiative and start doing loan mods is the lack of protection for servicers, which leaves these companies vulnerable to a bondholder backlash, especially in the case of loans that have been packaged in securitizations."
Culhane estimates that around 20% to 25% of all outstanding mortgage loans in the U.K. have been packaged into RMBS deals. This is perhaps not as significant as the portion these securitized mortgages make up in the U.S., but still a worthy consideration.
How should a pool of securitized mortgages be dealt with? Culhane said that one option is to contact all of the bondholders, although that still leaves some hang-ups. The more aggressive players look into buying big tranches and take more control of the deal because once the deal is unlocked, anything can be done with the loans.
For most companies, when the securitization market shut down, it was hard for them to find funding. Oakwood entered on the backend servicing side, offering workout capabilities and servicing.
Oakwood is at a particular advantage in the current market environment because as a special servicer, it has provided expert management of nonperforming loans to third-party clients, including a major investment bank, for more than four years.
Earlier this year, Fitch Ratings awarded Oakwood a European residential master servicer rating of 'RMS2', making it the highest Fitch-ranked provider of outsourced special servicing in the U.K. Fitch also gave the firm a residential master servicer rating of 'RSS2-', which is the first time the rating agency has ever assigned such a rating in Europe. It also means that Oakwood offers full-service workout capabilities.
Fitch based its ratings on the industry experience of senior management and the innovative servicing strategies employed by the company. These strategies include the continued proactive risk-grading and behavioral scoring of loans, allowing the company to efficiently deliver on specific arrears strategies.
The use of a loan modification calculator helps Oakwood to assess the best workout. Fitch's assessment of Oakwood's special servicing capability drew particular attention to the high levels of industry experience of senior management and the innovative servicing strategies employed by the company's first, and currently only, rated master servicer in Europe.
Culhane said that U.K. servicers today are going through extreme measures to facilitate exit strategies from mortgages. "We try to get the option that will be the least painful for all parties involved," Culhane said.
In the last two years, mortgage servicing has grown from being a little bit about real estate to being all about real estate.
"We recognized that we needed actual real estate expertise that understood a property's worth on a repossessed basis," he said. "It's still servicing, but we are now having to think about real estate all of the time."
In the U.K. and Europe, the problem with the servicing industry is that most servicers are geared for a performing environment and did not count on balance sheet servicing.
"For them the current environment has created a level of bottleneck where loans instead of being pushed through are held up," Culhane said. "At Oakwood, we've invested in the technology, and even in the worst case scenario we wouldn't have to add many more people to cover all aspects of the loan."
Culhane expects that the market will see more restructuring on the CMBS side as the structure allows for this.
"We've already begun to see an increase as special servicers on these deals get sacked and others put in place," he said. "We've just been mandated on a tranche that a group of bondholders are trying to find what their rights are and protect their interest."
Another area of growth has come from banks that have acquired portfolios of other lenders in the market. Culhane said that these banks don't always understand the assets and are looking to servicers for help to modify the assets or for a way to work them out. "These guys are basically trying to figure out how loan mods will help minimize their loss because they don't want to sell," he said.
Oakwood is currently looking at a way to bring the knowledge that servicing at a granular level provides and how that knowledge could be bridged with the pricing of these securities. "We are in the thought process, but we are still a long away from have an actual index," he said. "It's going to take years, but it is clear that investors want to be sold a product that they know, and they want to make sure that they understand what the underlying loan is doing and build up from that."
Culhane expects 2010 will be quite challenging. He referenced anecdotal evidence during the Great Depression.
"There is a correlation between the current rally in pricing that the market has seen today and the nine rallies that the market saw during the Great Depression," he said. "I would say that it would be wrong to think that we are out of the woods."
Loan modifications aren't just important to the revival of the U.S. mortgage market. The U.K. too recognizes the importance of keeping borrowers in their homes and has devised several initiatives to push loan modifications through, although with less success.
"The U.K. isn't thinking about loan modifications on the same level because it doesn't have to," Culhane said. "Part of the problem behind why more servicers just don't take the initiative and start doing loan mods is the lack of protection for servicers, which leaves these companies vulnerable to a bondholder backlash, especially in the case of loans that have been packaged in securitizations."
Culhane estimates that around 20% to 25% of all outstanding mortgage loans in the U.K. have been packaged into RMBS deals. This is perhaps not as significant as the portion these securitized mortgages make up in the U.S., but still a worthy consideration.
How should a pool of securitized mortgages be dealt with? Culhane said that one option is to contact all of the bondholders, although that still leaves some hang-ups. The more aggressive players look into buying big tranches and take more control of the deal because once the deal is unlocked, anything can be done with the loans.
For most companies, when the securitization market shut down, it was hard for them to find funding. Oakwood entered on the backend servicing side, offering workout capabilities and servicing.
Oakwood is at a particular advantage in the current market environment because as a special servicer, it has provided expert management of nonperforming loans to third-party clients, including a major investment bank, for more than four years.
Earlier this year, Fitch Ratings awarded Oakwood a European residential master servicer rating of 'RMS2', making it the highest Fitch-ranked provider of outsourced special servicing in the U.K. Fitch also gave the firm a residential master servicer rating of 'RSS2-', which is the first time the rating agency has ever assigned such a rating in Europe. It also means that Oakwood offers full-service workout capabilities.
Fitch based its ratings on the industry experience of senior management and the innovative servicing strategies employed by the company. These strategies include the continued proactive risk-grading and behavioral scoring of loans, allowing the company to efficiently deliver on specific arrears strategies.
The use of a loan modification calculator helps Oakwood to assess the best workout. Fitch's assessment of Oakwood's special servicing capability drew particular attention to the high levels of industry experience of senior management and the innovative servicing strategies employed by the company's first, and currently only, rated master servicer in Europe.
Culhane said that U.K. servicers today are going through extreme measures to facilitate exit strategies from mortgages. "We try to get the option that will be the least painful for all parties involved," Culhane said.
In the last two years, mortgage servicing has grown from being a little bit about real estate to being all about real estate.
"We recognized that we needed actual real estate expertise that understood a property's worth on a repossessed basis," he said. "It's still servicing, but we are now having to think about real estate all of the time."
In the U.K. and Europe, the problem with the servicing industry is that most servicers are geared for a performing environment and did not count on balance sheet servicing.
"For them the current environment has created a level of bottleneck where loans instead of being pushed through are held up," Culhane said. "At Oakwood, we've invested in the technology, and even in the worst case scenario we wouldn't have to add many more people to cover all aspects of the loan."
Culhane expects that the market will see more restructuring on the CMBS side as the structure allows for this.
"We've already begun to see an increase as special servicers on these deals get sacked and others put in place," he said. "We've just been mandated on a tranche that a group of bondholders are trying to find what their rights are and protect their interest."
Another area of growth has come from banks that have acquired portfolios of other lenders in the market. Culhane said that these banks don't always understand the assets and are looking to servicers for help to modify the assets or for a way to work them out. "These guys are basically trying to figure out how loan mods will help minimize their loss because they don't want to sell," he said.
Oakwood is currently looking at a way to bring the knowledge that servicing at a granular level provides and how that knowledge could be bridged with the pricing of these securities. "We are in the thought process, but we are still a long away from have an actual index," he said. "It's going to take years, but it is clear that investors want to be sold a product that they know, and they want to make sure that they understand what the underlying loan is doing and build up from that."
Culhane expects 2010 will be quite challenging. He referenced anecdotal evidence during the Great Depression.
"There is a correlation between the current rally in pricing that the market has seen today and the nine rallies that the market saw during the Great Depression," he said. "I would say that it would be wrong to think that we are out of the woods."
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