As a number of the nation's largest subprime mortgage companies parcel off servicing rights, investors are becoming increasingly concerned over the ability for the lenders to provide seamless servicing transitions.
What's more, some are shying away from seasoned bonds altogether because they have little faith in servicing ability. "Because of the dislocation of servicing and control, it's very difficult for us to stay in seasoned bonds," one asset manager said. "Servicing issues are huge right now."
Amid the circus of bankruptcy proceedings, mergers and acquisitions, regulatory actions and increasingly poor late vintage subprime mortgage performance, investors - largely those at the bottom of the capital structure - are either attempting to gain control over servicing or passing up HEL securities altogether, they say.
A growing number of subprime lenders have suffered ratings downgrades on their servicing operations, and the impending barrage of loan resets and requests for loan work-outs has market participants fearing inadequate capacity to handle the workload.
And while many point out that new services will crop up to fill voids in servicing capacity, one source last week questioned whether independent subprime servicers are large enough to handle the tide of loans that may be headed their direction. Others are questioning whether those buying servicing assets are qualified to do so.
In a recent example, last week hedge fund Carrington Capital Management won New Century Financial Corp.'s servicing assets for $184 million in a bankruptcy-court-authorized auction - a move that ruffled the feathers of trustee Wells Fargo. Wells filed an objection arguing that Carrington does not meet servicing eligibility requirements outlined in the pooling and servicing agreements, such as requirements for financial strength and requirements that it qualifies as an approved Fannie Mae or Freddie Mac servicer. Carrington won the assets, however, vowing to meet licensing requirements within six months.
In the time-sensitive realm of subprime servicing, lapses in notifications to borrowers that monthly payments will change, for example, could mean the difference between a performing and non-performing loan. What's more, subprime servicers are anticipating that troubled loans will stay on their books longer, as regulators tinker with timelines and as opportunities to refinance dwindle.
Servicers that had gathered at a recent workshop hosted by Fitch Ratings in New Orleans last month cited complex regulatory oversight and compliance, the increasing cost of servicing, proactive loss mitigation, increased default expectations and growing investor reporting requirements among their chief concerns.
Many, servicers included, are wondering how requests from borrowers and regulators for loan modifications will affect loan performance. "Almost all servicers indicated that they have not used modifications extensively as a loss mitigation tool in the past, primarily because there were other viable options for the borrowers," the rating agency reported last week.
For those loans that had experienced modifications, the rate of re-default had historically been in the 30% to 35% range, the servicers reported. The servicers noted that contacting borrowers who had slipped into default, either via telephone or mail, had become increasingly difficult. Contacting borrowers three months prior to an ARM reset, they said, was likely the most effective course of action in staving off eventual foreclosure.
The servicers also said repayment plans have moved to as long as 24 months from a three-to-six month range previously, and noted an uptick in forbearance agreements. The group expected foreclosure timelines to also lengthen, because of deluge of filings and repeated efforts to contact borrowers.
And according to Moody's Investors Service, there are more than 250 processes involved in servicing, including such operational aspects as collection ability, loss mitigation, REO timeline management and servicing stability. A number of those functions, servicers point out, rely on outside contractors. County recorders, BPO providers, property inspection and preservation and REO networks are also expected to experience a backlog of work, Fitch reported last week.
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