Still trying to unravel the after-effects of the October 1998 disaster and its ramifications for the residential MBS market, players from around the country converged on New York City last week for the third annual Fabozzi Residential Mortgage-Backed Securities Symposium to discuss possible pitfalls for the year ahead and analyze last year's turmoil.
One of the big concerns on every panelist's mind was the outlook for mortgage servicing. In light of the recent bankruptcies of mortgage servicers First Plus and United Companies Financial Corporation (UCFC), the role of the servicer for B&C companies-and an examination of what a servicer actually does-was discussed at great length.
"The longer it takes for these companies to move through bankruptcy court, the greater the delinquencies in the pool," said Linda Stesney, managing director of residential mortgage finance for Moody's Investors Service. "Going forward, who will want that servicer if delinquencies get that bad?"
Panelists saw the servicer crisis as a major threat to the industry going forward - a "potential minefield," said Chuck Ramsey, CEO of Mortgage Risk Assessment Corp. and chairman of the conference.
Some panelists even questioned whether the securitization market will survive if servicer risk is not cut out of the picture. According to Tom Albertson, assistant vice president at Duff & Phelps, part of the reason that liquidity dried up in the fourth quarter of 1998 was because of a lack of servicer strength and risk of servicer transfer.
Michelle Loesch, a fixed-income director at Standard & Poor's, concurred. "Servicing is a key factor, especially as pools begin to season," Loesch said. "The bloom came off the subprime rose of 1998. The process of transferring servicers needs to become easier."
Loesch predicted a time in the near future when companies will be able to "flip a switch and change servicers. I think the transaction would be better structured that way."
Furthermore, with all of these bankruptcies taking place, trustees in the subprime area do not want to take on risk anymore, panelists noted.
As a result, some companies process their pools through master servicers, though some panelists were not even sure what master servicers actually do, or if they have any worth.
"I think master servicers make duplicate records and create a back-up system for the deal," said Moody's Stesney. "But very few people do that for the five basis points paid out for this service."
As a result of the leading servicers going under recently, speakers feared that originators will begin to rely on smaller, riskier companies that have no clout in the business.
"These days, if you come to market with anybody but RFC as your servicer, good luck," commented Thomas Marano, senior managing director at Bear Stearns. "This shows you the importance of a good servicer. The market is not going to exist with rinky-dink servicers."
Portending "big problems in the future" if the big servicers do not get out of bankruptcy, Marano closed the discussion on the servicer crisis by asserting, "The book remains open on this one. It's in the judge's hands. - AT