Ask the senior management of Credit-Based Asset Servicing and Securitization (C-BASS) what the key to the success of their unique business model is - and how their firm has grown so rapidly in its six-year history - and the answer will most likely be, "We stick to what we know."
So far, the tactic has paid off for the company. The originality and perhaps single-mindedness of the founders' initial concept - to build an investment boutique specifically focused on credit risk and the credit-sensitive residential-mortgage market - has led the company to stand out among securitization/servicing shops as an innovator.
"The idea was to merge the concept of investing in mortgage product for loans that have a credit story to them with the opportunity to service these loans in a non-typical way," says Jeffrey Toll, senior managing director and co-founder of the company. "We focus on credit risk - that includes the pricing of these loans, due diligence and servicing. It is an integrated process, and securitization is the end-game. These are all tightly woven together to achieve success."
And with 99% of the mortgage market focused on prepayment or interest-rate risk - there is comparatively little concern for the credit side of the business - the management of C-BASS and its wholly-owned subsidiary, Houston, Texas-based Litton Loan Servicing, have made a career out of managing long-term credit risk and "servicing non-performing loans with kid gloves."
Beginnings and development
The seeds of the concept can be traced back to the Citibank MBS team of 1994-95, where Toll and several other C-BASS co-founders worked on one of the largest securitizations of non-performing loans. "When we did that deal, we saw that there was opportunity to create a business that focuses on both the credit side of the mortgage business and the servicing side of delinquent borrowers," Toll said. "It's labor-intensive to service a non-performing loan. Not many people want to remind a borrower to pay or to trace the timeline of a foreclosure. But we pay attention at C-BASS, because we own and service the assets ourselves - it's our own investment."
The company has carved out its unique niche by wearing two hats. It is both an investor and a servicer of credit-sensitive mortgages, including: sub- and non-performing loans, "scratch and dent" securities, subprime performing loans and residuals, B' pieces and FHA/VA early buyouts. The firm, however, does not originate its own loans; additionally, it reserves third-party servicing for "strategic relationships" only.
"But we buy the more risky securities," Toll said. "And when a loan becomes delinquent, we want the servicing transferred to us. Our motto is, Let us service it, it is our investment'. By doing our own servicing, we are controlling our own destiny."
C-BASS, which is a hold-to-maturity investor, has the goal and ability to take on long-term credit risk in the riskiest of securities, as it maintains its own servicing platform for its investments.
In fact, its subsidiary, Litton Loan Servicing, has the distinction of being the first servicer to receive the highest possible special and subprime residential servicer ratings from all three rating agencies. Litton services all of C-BASS's loan acquisitions.
The company's success in its chosen niche is reflected in the growth of its portfolio. It serviced only $800 million worth of mortgage loans (representing about 20,000 loans) when the firm was first starting in 1996. Its current portfolio of loans serviced is worth $8.7 billion, which is made of more than 120,000 loans.
In order to keep up with the ever-increasing size of its portfolio, C-BASS' employee base has similarly grown by leaps and bounds: in 1996, the company's New York offices only had six people and the Houston-based operation consisted of 50 employees; those numbers have multiplied 10-fold, as C-BASS now has almost 60 employees in New York while Litton now has 600. Even more impressive, the turnover rate at the company is virtually zero, as the shop has not lost one senior manager since it was formed.
End goal: securitization
Aside from being both an investor and a servicer, C-BASS is also a regular issuer into the securitization market. So far, it has completed 26 deals totaling more than $4 billion. This is in addition to 15 whole-loan securitizations, 9 B-piece resecuritizations and two CBOs, with another one due to close at the end of the month.
Without a doubt, securitization has become a part of the firm's overarching business strategy -- which is to buy assets, to own and service them, and then to eventually securitize them. According to Toll, the proceeds from these transactions are used to pay off bank debt which was syndicated through Banc of America Securities. The company currently maintains a $550 million credit facility with ten banks participating.
Following in line with the shop's penchant for servicing credit-sensitive mortgages, C-BASS owns the first-loss piece in all of its deals. Though this is something that is probably not uncommon in most securitizations, in CBO land it is rather unique - or even strange - for issuers to own all the equity in their deals.
"We want the equity...we want to hold that risk and we are comfortable with it," Toll said.
C-BASS also recently hired Landon Parsons to buy non-real estate ABS for its structured finance CBOs, in order to satisfy the diversity requirements in these pools. He also heads up the company's CBO group.
C-BASS viewed the opportunity to enter the CBO marketplace as a more attractive option than continuing to issue Re-Remics, which had been the common practice for many years. With CBOs, the company is now able to gain access to longer-term financing and achieve better diversification.
Watching out for
In its quest to provide loan-by-loan management, C-BASS is launching its proprietary system, dubbed RADAR. As a servicing platform, the system will feature online, realtime servicing information. This would allow for departmental integration of factors that affect a loan's value, which change constantly.
The system would also feature accurate mark-to-market valuations on delinquent mortgages. It does this by monitoring and providing information on the different factors that affect the value of a loan, such as the value of a foreclosure resolution. By being able to monitor this type of data, servicing on the mortgage becomes more efficient and therefore results in more assets going back to performing status.
C-BASS also benefits from being owned by mortgage insurance providers Radian Guaranty, Inc. and Mortgage Guaranty Insurance Corp. (MGIC). Radian and MGIC own databases that contain a significant amount of information on loan performance. C-BASS is able to use the information contained in these databases to build assumptions on the mortgage loans in their portfolio.
"In this way, we are able to concentrate on the 3 D's' of our mortgage-loan monitoring system: data, due diligence and default management," Toll said. "Therefore, it makes sense for us to buy these credit-sensitive loans. We can confirm that the servicer is doing the proper job."