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Boardroom view.

The supply-demand equation that sets servicing prices has been shifting a bit. The origination slowdown that hit last year has produced some upward pressure on servicing values, according to one servicing broker close to the action. Fewer new loans being created, coupled with a brief hiatus from more new RTC servicing coming onto the market, actually combined to help boost prices in this year's first quarter.

Much has been written about the RTC flooding the market with servicing thus creating an oversupply that's deflated prices. Well, that could finally be changing somewhat. But, like everything connected to the federal government, if something is being done well, don't cunt on it to last too long. So it is with the RTC's temporary respite from bringing new servicing from failed thrifts to the auction block. RTC was basically put on hold when its operating funds dried up. But now Congress has approved new cash, so more thrift closings are on the way. And, of course, that means more thrift servicing is also on its way.

The supply-demand improvement that actually boosted servicing prices across the board in the first quarter was pointed out by a panel on servicing valuation at the National Secondary Market Conference in Atlanta. David L. Solomon, executive vice president and manager of the Midwest region for Hamilton, Carter, Smith & Company, Inc., said that the value of all servicing rights are "up about 20 percent versus prices in December 1990." He said because prices for high-quality agency servicing have been bid up fairly significantly recently because of bulging demand buyers have begun to take renewed interest in GNMA servicing. He said as a result, high-quality GNMA servicing is now going for prices in the range of 170 to 185 basic points. He added that agency servicing from certain regions including the Southeast and Midwest is now typically going for five times the servicing fee. He added that high-quality, non-recourse agency servicing is "now trading almost at 1987 levels" or close to its historical highs because there is currently so much demand for this product.

Solomon said that one of the tougher regions to sell servicing from currently is the Northeast and "to some extent California, but California has been improving over the last quarter." The servicing broker said." I think you could sell Texas [servicing] all day long." But by contrast, he said, "Fannie Mae recourse servicing from the Northeast is probably the toughest deal to move right now."

The "wild card" on the horizon is what will happen when the RTC gets its new cash to close a boat load of new thrifts. Will the new flood of RTC servicing substantially depress prices for servicing? The odds are it will reverse the servicing price runup of recent months because the new RTC servicing will be added to an upsurge in new servicing coming from a revived origination market. Solomon says RTC is planning to use its new money to close another 21-5 institutions before September 30. His firm is currently trying to pinpoint which thrifts will be the most likely candidates to be closed by the regulators.

Solomon reviewed how servicing prices have ebbed and flowed in recent years in response to anticipated actions by regulators and lawmakers. He cited March 1989, when the thrift bailout law was being discussed by Congress, as one of the most difficult times in recent market history to sell servicing. That legislative discussion put a freeze on servicing sales. "I can't think of a time in the last five years that has been more difficult to sell servicing." He said the market was worried at the time that thrifts would have to conduct a massive selloff of purchased servicing if it was not given adequate recognition in terms of reaching required capital levels. If the thrift law had said that purchased servicing could not be counted toward thrift capital requirements, or if it severly discounted the amounts that could be counted, "servicing prices could have just dropped completely off the map for all institutions," Solomon said.

Accounting rules have also contributed to the seesaw pattern of prices for mortgage servicing in recent years. An accounting rule change in 1988 changed how firms capitalize excess servicing. This change has produced a rash of quarterly sales of servicing to help bolster balance sheets for some servicers. Solomon said, "75 percent of the trades that Hamilton Carter Smith does now involve someone wanting to report a gain on a sale by a certain quarter."

Another regulatory development that put a temporary chill on servicing sales was the Office of Thrift supervision's positin, since put on hold, that GNMA servicing, backed by more than 20 percent VA loan balances, would be treated as recourse, requiring more capital to be held against it. Solomon says now that the regulators have pulled back from that position, "Most firms are confidant that one won't come back to bite us."

Solomon told the audience he wanted to disple some myths about buying and bidding on RTC servicing. His firm is one of two advisors to the RTC on sales of its stock-pile of servicing. H said that "just because a transaction says 'RTC' on it, it doesn't mean that the servicing is low-quality servicing." He characterized it as "myths number one" that RTC portfolios have very low value. Myth number two, he said, was that buyers can use a strategy of "throwing out a price and really beat [RTC] down in the purchase and sale agreement." Also, Solomon emphasized, future and current buyers need to have their capital all lined up before they start the bidding process in earnest. He said, "the check is in the mail "type promises are going to be a bigger handicap now to getting a bid accepted than they may have been in the past.

Solomon said that "RTC is getting out of the time-wasting business. They are now in the business of moving these assets." As a result, he says, "It's going to be incredibly more difficult for firms that don't have their financing in place to get their bids looked at favorably." He predicted that the hoops you are going to have to jump through with advisors and brokers to prove your capital is there to bid will increase.

RTC has recently been trying to streamline the bidding process by informing all interested parties that they must stick by the standard purchase and sale agreement terms and take care of their specific concerns about a package through the price they bid. Solomon said the RTC "is no longer in the business of negotiating contract by contract."

RTC has been saying a revised sale agreement will be out and in use shortly. But it had not been officially released as of early April. The August 30, 1990 version of the contract is still the standard one in use, Solomon said. But Solomon says buyers have two options if they want their bids seriously considered: stick by the contract's terms and adjust price bids for problems; or "try to negotiate the contract and wait nine months and lose the deal."

He confirmed that bidders are pricing into their bids the fact that they have to deal with the hassles of RTC's bureaucracy in getting a deal closed. But he said not all RTC deals have taken forever to close. Solomon says, "They have done deals in 60 days and they have done deals in 10 months."

He added there are lots of RTC deals currently in the works, and the market is improving and will be an ally in moving some of the RTC's new servicing.

While emphasizing that RTC had some high-quality servicing to sell, Solomon also said he had sold some RTC portfolios with 12 percent deliquency rates and 4 percent foreclosure rates. That is the kind of thing that will certainly fuel a myth that RTC portfolios are a bad dream come true. But Solomon said that he had also sold some RTC portfolios with excellent deliquency and foreclosure rates. Solomon also told the audience that with the new standard contract, he understood there would be better claims procedures foer the RTC to follow to make good on their reps and warranties.
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Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Article Type:column
Date:May 1, 1991
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