The swift rise of Russian RMBS has been a shot in the arm for servicing in the country. Leading banks are turning what was once an unsophisticated and highly personalized business model into an industry with the nimble technology and developed systems prevalent in the U.S. and Western Europe.
But vestiges of the old approach linger in some areas. Well-defined roles of servicers, for example, are lacking. And the market is still predominantly one where mortgage originators service their own portfolios.
Still, for a market as young as Russian RMBS - the first came out in mid-2006 - development on every front has moved quickly. Mortgages themselves are still green, with loan origination seriously getting started only in the past five years. It would follow, then, that servicing has been, until quite recently, wet behind the ears.
"[For most banks,] servicing was individual borrower-oriented, with very simple procedures and without the use of MIS [management information systems]," said Andrey Milyutin, project manager at the International Finance Corp.
That worked initially, when banks dealt with only a small batch of private banking-type clients.
But now it's different, at least at such leading originators as Sberbank, Vneshtorgbank and Gazprombank. "Medium and large banks, for the most part, have good IT systems in Russia," said Daniel Mumzhiu, assistant vice president of business development at Moody's Investors Service. "They're all reasonably new banks, [so] their IT systems are on par with many Western banks."
Moving from an ultrapersonalized approach to a more technologically standardized one wasn't such a leap for these banks.
Moody's has so far issued only one public rating on a Russian servicer, an SQ3' primary servicer rating for Russian Standard Bank. The rating, however, applies only to RSB's servicing of secured and unsecured consumer loans in the Russian Federation. The bank isn't a player in the mortgage market.
Moody's expects to assign more servicer ratings in Russia in the near future, Mumzhiu said.
The use of advanced servicing systems doesn't hold true for all, or even most, banks in Russia. While nine banks accounted for more than 70% of mortgage origination in Russia as of June 30, 2007, the remaining share is divided among quite a sprawl of smaller banks. According to Fitch Ratings, the number of institutions - bank and nonbank - making mortgage loans swelled to 440 in 2006 from around 200 in 2004.
Many of these mortgage rookies, spread throughout Russia, have IT systems that are severely lacking. In some ways, their personalized, often low-tech relationship with borrowers has not necessarily been a disadvantage. Tied to the cultural mindset around credit, it keeps delinquencies down. "Individual borrowers perceive their relationship with their lenders as personal and have a strong commitment to maintaining debt payments," Fitch said.
But clearly, if a bank wants to increase its portfolio or be assessed as a servicer by rating agencies, a robust MIS is necessary. Milyutin said that one way the smaller players have been updating their systems is through relationships with such biggies as the Agency for Housing Mortgage Lending (AHML), Russia's version of Fannie Mae, and Gazprombank, both of which purchase pools from banks across the country.
AHML, for instance, will share its technology with network banks to ensure that their practices are up to snuff. If servicers working with AHML were to hold onto their individualized approach to servicing, the agency would be overwhelmed with a couple of hundred nonstandardized reports, Milyutin said.
Defining Roles
While technology and better practices are being implemented, the country is just beginning to develop concepts that identify precisely what a primary, special and master servicer do in a transaction. Russian players, for instance, have only recently started to include the kinds of pooling and servicing agreements and service-level agreements that are common in countries where securitization is long established, sources said.
So far, in most cases, the seller of a pool of mortgages has continued to perform every role of a servicer, according to Fitch. There have also been cases of the seller outsourcing the primary role to a subservicer while retaining responsibilities associated with special servicing, such as handling defaulted loans.
Master servicing in Russia is less developed. In its report, Fitch said it will not issue ratings for a master servicer until the role is more clearly defined or the master servicer becomes a "more common structural feature."
Analysts at Fitch didn't return calls for comment.
Moody's, on the other hand, is ready to rate master servicers in Russia, Mumzhiu said.
The IFC's Milyutin agreed that there isn't a clear definition in Russia of a master servicer, but he noted that players are effectively playing the role already in Russia. "In practice, what AHML and Gazprombank do is analogous to what a typical master servicer in the U.S. does," he said.
While Fitch apparently doesn't have any master servicer ratings in the works, the agency has entered other servicer categories in Russia. On Sept. 17, it issued its first public rating of a Russian servicer, giving Morgan Stanley-owned City Mortgage Bank a RPS3(RU)' for primary servicing. As of July 2007, City Mortgage's servicing portfolio included five unsecuritized deals and one RMBS, CityMortgage MBS Finance (ASR, 8/14/06), according to Fitch. The portfolio adds up to more than 5,400 loans worth $422 million outstanding.
The youth of Russian servicing, a healthy property market over the past few years and the persistence of a credit culture that values strong ties between lender and borrower have raised questions about servicers' ability to deal effectively with defaulted loans. A low level of arrears in the market's short history means mortgage "servicers have limited if any practical special servicing experience," Fitch said.
Mumzhiu likewise acknowledges that so far there hasn't been much of a need for special servicing because the performance of loans has been strong. "A lot of the banks have plans in place for what they would do if a certain category of loans were to default," he said. But with little reason to fear delinquencies, how much focus each originator has put on the special servicing side of the coin has varied. "It's a case-by-case basis," Mumzhiu said.
For Russian Standard Bank, a Moody's report characterizes the recoveries as "excellent [with] strong ultimate collection processes and measures [that] limit the resulting loss from debtor defaults." But then again, this applies to consumer loans.
There is, however, one facet of RSB's special servicing that might apply to other asset classes, as it illustrates how local culture seeps into the modus operandi. "For psychological reasons, the collection staff for loans with only one payment in arrears consists of women only, where in the next arrears stage, only men conduct the calls," Moody's said.
Lest an observer wrongly conclude that the more aggressive approach of the male staff can escalate to another level in stage three, the agency adds: "RSB's collection staff in any phase operates without physically threatening the client or any other form of pressure."
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