The Subservicing Business Could Boom, and Here’s Why

February 2010 – Bad news, occasionally, has a way of turning into a profit opportunity for someone. By now, readers probably are fully aware that the price being offered on “servicing released premiums” is in the tank and has been since the credit markets disintegrated in the fall of 2008 and interest rates began their historic decent.

Currently, the SRP on new production is roughly 100 basis points or about four times the servicing fee on newly originated Fannie Mae and Freddie Mac loans. Before the market cracked up, the SRP was as high as 175 basis points. It was a sweet premium and seller/servicers knew it.

Nonbanks and even depositories were doing quire well with their SRPs and they took the money while the getting was good. And that meant many originators, especially the small- to medium-sized nonbanks, were not bothering to keep the servicing “strip” on the loans they produced. The idea was to take the SRP cash now and let the big aggregators (Wells Fargo, Bank of America/Countrywide, CitiMortgage and Chase) worry about it. (Some institutions maintained a small servicing portfolio while selling everything “released” into the secondary market).

Oh, but that was then. Today, Fannie, Freddie and HUD are tightening up their net worth requirements. Eventually, all three entities will mandate that their servicers have a minimum net worth of $2.5 million. To smaller players this might look like a death sentence. But not so fast. From what I’m told, dozens of small- to medium-sized nonblank lenders (and yes, even some depositories) are now considering keeping their SRPs.

The choice is easy. If they keep the servicing strip they can write up the value of the SRP. And with interest rates rising, guess what? The SRP can be a very valuable asset indeed. In other words, just because Wells won’t pay you 150 basis points for the SRP, that doesn’t mean it’s not worth 150. It could be worth 150 – and the economic value of that strip can be counted toward establishing a net worth of $2.5 million.

But keeping servicing rights – instead of selling them – may not be an option for all firms. If a mortgage banker doesn’t already have a servicing platform it can either buy an existing shop or build one from scratch. Or they can contract out the servicing function with a subservicing specialist. For subservicers this could mean a boom in the business.

Firms like Cenlar of Ewing, N.J. have already seen, or will soon see, an increase in contracts. “A number of mortgage bankers that were originating and selling 100% servicing-released are now keeping some of that,” said Cenlar senior vice president Dave Miller. When I asked him why he didn’t hesitate to answer: “Because the SRP is so poor”.

Thanks to this renewed interest in keeping servicing rights, Cenlar is expecting good things in the year ahead. The company recently leapfrogged over Dovenmuehle to become the nation’s largest subservicer of mortgages, according to figures compiled by the Quarterly Data Report. (At last check Cenlar had about $93 billion in contracts compared to $73 billion for Bank of America and $70 billion for Dovenmuehle).

If what I’m hearing about SRPs and the desire to keep servicing holds, subservicers could benefit quite handsomely. At this point, the only “wild card” affecting this equation is the aggregators. If suddenly, the big four start paying up for SRPs the situation could reverse, but as of this writing that doesn’t look like it will happen.

Source: Mortgage Servicing News, February 2010, by Paul Muolo

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