It is ten thirty at night on Sunday and I am at the store. I have mentioned before that Sunday is a day I like to spend reading, studying and learning. Most of my day was preoccupied by other demands, but I am finally able to settle in for some study, and especially with an eye on the markets and tomorrow’s open. To that end, I have been looking at TZROP. I have been through their public report, and done some other reading, but still in learning mode.
Another topic I have touched on tonight is my favorite: mortgage banking. Readers will know, I have a dim view of loan servicing, especially as an asset to invest in, but also primarily because it is wholly unsupportable from the perspective of both mortgagor and investor. The actual task of receiving, applying, and remitting mortgage payments into a bond structure is so stupid simple that no customer would ever pay the mortgage servicing fee, if they ever knew they were paying it, and had a choice. That means, yup, the only ones benefiting are the servicers.
The Covid-19 pandemic has forced changes on servicers which bring their (lack of) utility into focus. These are basic changes of work-from-home, and customer self-service which 1) should have been made ten years ago, but for the problem that it 2) undermines the idea that the utility provided supports the amount paid by borrowers. As servicers move their teams to work from home, they will enjoy reductions in overhead costs at their facilities. Their decentralized workforce will demonstrate that the tasks of loan servicing can be largely crowdsourced, when human intelligence is required. Servicers are accelerating the already purposeful programs migrating customers to perform much of the work of servicing themselves, using self-service options online.
So, when will the servicing fee come down? When will we start to see some price wars with servicers trying to attract borrowers to their platforms with discounts and incentive? When will we see agents paying premiums and incentives to mortgagors in exchange for rights to transaction information about tax and insurance payments, or other personal information? When will borrowers be able to choose? My answer is: we will see things like this before your current MSR’s expected duration is up.
The drum beat I am pounding is that servicing is an anachronistic institution. One which we are doing out of habit, because the people paying don’t really know they are paying it, and because there is no real incentive for the servicing industry to innovate, except on cost of regulatory compliance. Because of this, it is structurally weak, and ready for a fall. For those who knock it over, there will be opportunity.
In other news, I will again recommend Peter McCormack’s four part docu-series about our current Treasury Secretary, Kip Mnuchin, which you can find on YouTube here:
It is about ten minutes after three in the afternoon on Sunday, and I am at the store. Sunday is a day I dedicate to study and learning, and today I have been smarting up on the CARES Act, CA AB 2501, and incidentally reading the MBA letter issued to the Chairman of the Federal Reserve on May 28, 2020 titled “Request for Clarifying Guidance on Independent Mortgage Banks Eligibility Under the Main Street Loan Program”. Let’s take this last one first, since it is the one that finally halted me.
The purpose of the letter is to ask the Fed to clarify restrictions and limitation on participating in the Main Street Lending Program (MSLP) to ensure Independent Mortgage Banks (IMB’s) can participate and get loans to fund their operations. The MSLP is among the many actions taken by congress, the Fed and Treasury to provide liquidity to small businesses. Here is my recap of the letter:
IMBs need access to operating funds, even though they have large credit facilities for the purpose of financing their mortgage loan purchases. Since these giant facilities can’t be used for operating purposes, generally, the IMBs want access to loans which can be,
The giant warehouse credit facilities are already lent at multiples much higher than the maximum multiple allowed under the MSLP. The letter seeks to exclude these giant credit facilities so that their remaining leverage ratio will allow them to qualify for more debt,
The giant credit facilities already encumber all of the company’s assets, and it is warranted that no new lien will hold the same or higher level of security interest. The MSLP requirement of seniority or pari passu renders IMBs ineligible. They would like the government to accept a lower priority so that the IMBs can access the funds,
Banks and finance companies whose stock and trade is money, and who engage in finance activities, are expressly excluded, except for i.) those that engage primarily in loan servicing and ii.) those that “originate to sell” and sell their loans within 14 days of origination. The letter hopes to eliminate the 14 day requirement, since some loans may take longer than 14 days to sell.
That isn’t exactly how letter-writer Pete Mills put it though. Here is the link to the letter:
I have a few beefs here. The main one though, amid what is otherwise a weak plea for a spray with the Fed’s money hose, is that this exact cohort of businesses are currently experiencing some of the most gob-smacking margins any of them have ever witnessed, and the industry is so far over its capacity with quick, easy-money refinances due to the low, Fed-induced rates their main problem is stuffing their pockets as fast as they can while these dislocations prevail. It is gross.
Independent banks that “originate to sell” in particular should not need the benefits of additional operating capital during these times. They are drowning in a sea of money and asking for a money float. Servicers face a different set of challenges, and I will write more about them here shortly, but they, too are not in a position of financial difficulty at this time, and are in fact enjoying out sized gains and opportunities. Recall that I wrote about the first quarter earnings calls for some of these same businesses a short time ago, here:
I will re-post the quote from CEO of Ocwen (OCN) Glen Massina:
“In terms of the profitability of new servicing, look, margins in the origination environment we’re in today are at levels few of us have seen in our lifetime. It’s a very robust originations market, both from a volume and a margin perspective. In our portfolio retention channel, the economics are such that fundamentally, MSRs — the cash cost of the MSR is zero. So we are — that MSR has come back — coming back to us without necessarily a cash investment. And margins and correspondent lending, again, are as wide as — and our flow channel’s wide as we’ve seen them in quite a long time. So the cash cost, so to speak, of MSR creation is well below the fair value. There’s a number of dislocations in the market, as you might be able to suspect, that’s kind of driving that. But the returns on MSRs today are some of the best we’ve seen.” [emphasis mine]
To translate, he is saying that this industry is currently feasting, and that the market dislocations are a big part of it. Massina repeatedly made the case during the earnings call that the only constraint on (Ocwen’s) growth would be its access to capital to invest. They don’t need this money to continue as a going concern, they want it to further leverage profits.
I get the MBA is in the business of advocating for the advantage of their constituents. I get that everyone who is in business is trying to leave no advantage on the table when it comes to profit, or survival. It is still gross. Maybe if you are an IMB and finding yourself in financial difficulty right now, you should call rwhadvisory LLC and ask for help instead of asking the taxpayer for another bailout. I will accept either equity in your company, or #bitcoin as payment.
Anyway, I set out today to address this CA AB 2501 matter and got side-tracked. I have used my entire time-block to scree on this other letter. Here is the short version of my AB 2501 thoughts:
Predictably, I am unsympathetic to the servicers
I find the May 17, 2020 MBA letter to the California assembly to be more weak tea
I think this bill seems like too much right now, but will turn out to be almost about right as we continue through the pandemic, and I bet multiple, successive actions at the federal level will eventually catch up with what is being proposed in AB 2501
Whether the bill is good or bad, this bill is reason #47 for why residential mortgage loan servicing is not an asset
I will be back very soon to expound a little more.
Final thought, and it goes pretty good with the mood of my post, check out the latest by @peterMcCormack on his Defiance TV pod:
