| NEW YORK
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
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
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,
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
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
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
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.