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B&C Turmoil Raises Questions about Servicing
By Ted Cornwell
It's been a summer of turmoil for the mortgage lending industry. And while most of the attention has been devoted to the meltdown of the subprime loan origination sector, servicers have not gone unscathed.
After all, most mortgage servicers are part of larger companies that make much of their bread and butter off of loan origination. At least that's the way it used to be.
So what happens to the servicing shop when a company closes down its loan origination unit or scales that business back dramatically? It turns out there's no easy answer to this question.
Of the top 10 subprime servicers in the second quarter of this year, five have disclosed suffering from serious financial challenges since the start of the third quarter. One of them, Option One Mortgage, is in the process of being sold to private equity firm Cerberus. Option One serviced a $68 billion subprime portfolio as of June 30. And Citigroup has an option to buy certain assets from another top 10 subprime servicer, Ameriquest/Argent, which serviced a $57 billion portfolio at the end of June.
So far, most of the servicing seems to be staying where it is. But when a company closes its origination pipeline, there isn't much reason to stay in the servicing business for the long haul. Already, rating agencies have issued a slew of downgrades on loan servicing ratings, citing the financial uncertainty caused by illiquidity at the parent company level.
The decline and fall of some lenders portends big servicing sales at some point down the road.
But nobody seems to be in a hurry to unload servicing. With long-term interest rates edging down amid increasing worry about the possibility of a recession, the value of servicing rights has also been trending lower. Most companies don't seem to think now is the time to sell servicing rights in order to raise cash or offset liquidity challenges in the origination sector.
The bad news hasn't stopped coming. Lehman Brothers last week closed down its BNC Mortgage subsidiary, citing a reduction in the need for resources and capacity in the subprime lending space. But Lehman said it will originate mortgages through its Aurora Loan Services unit, the company's Colorado-based platform that traditionally has served as the servicing platform for its portfolio. The company's total servicing portfolio exceeded $90 billion at the end of last year, according to SourceMedia's Mortgage Industry Directory.
And Accredited Home Lenders Holding Co., San Diego, closed its lending business for "restructuring" amid a disputed attempt to hold private equity firm Lone Star to a deal to buy the company. Accredited serviced about $11 billion of home loans at the end of last year.
Most recently, Capital One Financial, a relatively recent entrant in the mortgage business with its purchase of GreenPoint Mortgage, said it will shut down that lending subsidiary amid turmoil in the subprime mortgage business.
But today's turmoil could create investment opportunities in servicing. One published report suggested that Warren Buffet was interested in investing in Countrywide's mortgage servicing rights, despite the company's recent woes. Already, Countrywide got a jolt of confidence stemming from a $2 billion investment made by Bank of America.
And if Warren Buffet really is interested in the mortgage sector, that's good news. He doesn't place bad bets very often.
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