NEW YORK The halcyon days of the U.S. housing boom were a veritable gravy train for companies in the business of collecting monthly mortgage payments from homeowners.
All these so-called "mortgage servicers" had to do was process the monthly cash stream from borrowers, who generally paid on time, and forward the money to mortgage security investors, pocketing a percentage of each loan they handled. It was a highly automated, low-overhead and very profitable enterprise.
But the U.S. housing boom of the past few years has turned into the worst real estate slump since the Great Depression, and mortgage defaults by home owners now threaten to turn this former backwater of the $10 trillion mortgage market into the next victim of the credit crunch of the past year.
What's more, mortgage servicers are so ill-equipped to handle the deluge of defaults that they may be worsening the housing crisis and pushing the U.S. economy closer to recession.
Servicing home loans once meant the low overhead task of overseeing monthly mortgage payments and passing the money onto investors. In the aftermath of the subprime mortgage meltdown it now involves the much more costly and people-intensive job of helping Americans save their homes, one by one, by easing payments on unaffordable mortgages.
Tighter credit conditions and falling home values have also dried up the supply of new business for servicers.
"If they are not careful, servicers may be the next in line" to follow dozens of failed mortgage lenders, said Rick Smith, chief executive officer of Marix Servicing LLC in Phoenix, Arizona. "They are not getting more loans, but need twice as many people. How long can you operate at a negative cost of service?"
Servicers of subprime loans, such as Ocwen Financial Corp (OCN.N), are in the worst predicament since the companies must send payments to investors of mortgage-backed bonds created out of pools of home loans even if homeowners are delinquent, analysts said.
Properties that go into foreclosure are also increasingly harder to get off the books as home prices fall, leaving companies with associated costs.
West Palm Beach, Florida-based Ocwen on Tuesday said it lost $6.9 million last quarter, down from a $13.9 million profit a year ago, after writing down mortgage securities, and after a 70 percent jump in interest cost on borrowings for advances.
Ocwen, whose shares are down 59 percent from their 52-week high in April, said servicing on non-performing loans and real-estate it now owns rose to 19.6 percent of loans serviced from 8.1 percent a year earlier, but Ocwen's president touted the company's cost controls in a conference call on Tuesday.
"There are a lot of actions (by servicers) that are cost-minimizing and not performance-maximizing," Rod Dubitsky, a managing director at Credit Suisse, said on an American Securitization Forum panel, the nation's biggest bond lobbying group, in Las Vegas last week.
Defaults on loans backing subprime mortgage bonds continued to worsen in January despite servicer and government efforts to reverse the trend, Citigroup Inc. research shows. An alliance of servicers and counselors last week claimed their efforts saved 545,000 subprime homeowners from foreclosure in the second half of 2007, though they acknowledged more work was needed.
Servicers -- like lenders, dealers and investors -- badly underestimated how high U.S. mortgage defaults would get.
Businesses staffed to handle delinquencies on around 6.0 percent of the loans they service, saw the rate triple, said Marix's Smith. But they have been slow to boost staff and update technology to meet the workload, he added.
Marix, a year-old company partly funded by Marathon Asset Management, is putting more loss mitigation officers on staff instead of less-skilled call center operators in order to win contracts from investors frustrated with current servicers.
Wall Street dealers with long relationships with servicing companies are also calling for stepped-up efforts to halt the delinquencies that threaten their livelihoods. The lack of trading, or liquidity, in mortgage bonds is the most serious threat to the bond business, ASF conference-goers said.
"Servicing is going to be the focus, in my view, of how we get out of all this," Tom Marano, global head of mortgage- and asset-backed securities at Bear Stearns & Co., told the firm's customers at a conference in January.
Subprime loan servicers including Accredited Home Lenders and Merrill Lynch & Co.'s MER.N Home Loan Services have been expanding, executives said. Home Loan Services increased loss mitigation staff by 216 percent this year, Nanette Stevens, a managing director, said at the ASF meeting.
"It's a challenge," Stevens said of increasing efforts. "It is squeezing our profit but we are still profitable."
A review of 20 mortgage servicers by a group of state attorneys general and regulators found many companies designed to deal with defaults due to job loss or divorce, but not ready to re-underwrite a massive number of loans made under irresponsible terms.
While there was "considerable agreement" among servicers that they should intensify efforts, "a considerable disconnect existed between words and actions, particularly as to the availability of loan modifications," the State Foreclosure Prevention Working Group led by Iowa Attorney General Tom Miller, said in a report last week.