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Boardroom view.


A "Special Market Intelligence Report" sounds promising, whatever the topic. But since this one is on servicing, all the better.

Miami-based Reserve Financial Management Corporation has packaged some neat data and trends on the secondary market for servicing into a fat little report tagged with the catchy title: "The 1991 Servicing Secondary Market."

One of the better phrases that comes out of the summary on the trends affecting government servicing is: "VA-phobia can sometimes be nearly mindless." That comment comes in the outlook section for GNMA servicing, which references a 1989 Office of Thrift Supervision (OTS) action, subsequently retracted, branding GNMA servicing as recourse where there is more than a certain concentration of VA loans present. Reserve says this mindlessness is particularly evident when the phobia prompts VA loans to get branded as bad, "even when the real risk is inconsequential, such as [for loan] with low principal balance (for which the effective level of VA guaranty is far higher than on identical, larger loan), or those with very low effective LTV ratios."

Yet, the report adds tha, mindless or not, the regulators' skittishness has had a real impact on prices. "GNMA servicing continues to trade 30 to 50 basis points less than in late 1988," it states. The overwhelming reason for this pricing "is VA no-bid exposure and the fear that agency regulators will impose a capital penalty on servicing GNMAs."

The report tries to scope out pricing and demand trends for servicing from different regions by product type and supplies a collection of state-by-state tables of pricing data. GNMA servicing on loans based in the Midwest, Mid-Atlantic and the Southeast still catches the fancy of a healthy group of buyers, and new product of this type sells in the flow market for between 1.75 percent and 1.85 percent, according to Reserve report. The Golden State got socked by depressed GNMA servicing prices during 1990. The intelligence report attributes the discounting of California GNMA servicing to high prepayment forecasts prompted by fast runoff during 1988 to 1990. And in a not-so-subtle dig at GNMA policymakers, the report notes that "the cost of subsidies made under the Soldier's and Sailor's Relief Act hurt prices and raised new questions about the attitude of GNMA toward its servicers."

Non-recourse conventional servicing is still in the process of a price runup, as several commentators have noted in recent months. Reserve-brokered, recent offerings from the Midwest and Southeast of this type have traded in excess of 5 times the servicing fee, the report states. If the package comes with a concentration in an acceptable geographic area, and it has typical servicing fees and it's non-recourse, it was trading from between 185 to 195 basis points when the report was written. That price range is an increase of 15 percent versus prices in the third and fourth quarter of 1990.

The regional preferences of buyers continue to create sharply divergent pricing for the same product. California continues to suffer from a bad reputation on the prepayment front. But the Reserve report notes that prepayments have slowed recently in California, and that trend is expected to continue. Even so, California is having a tough time shaking its track record on faster prepayments, and it is also suffering from the perception that it is the land of lowdocs, and it smacks of mortgage broker originations. The report puts it this way: "California servicing trades lower, again due to the ghost of prior rapid prepays and the feeling that packages may contain concealed quantities of third-party originations or low-document/quick-underwriting loans."

The dark clouds gathering over conventional servicing fingered by Reserve's intelligence report include a specter of refinancings sparking waves of runoff. "A potential negative which threatens conventional servicing particularly is the risk of runoff from a continuation of the declines in interest rates. As we warned in early 1990, the value of servicing falls swiftly as interest rates fall, because servicing trades on the expectation of prepayments, not their reality."

The other red flag the report raises as a potential obstacle to free trade in the servicing marketplace is "the reluctance of Freddie Mac (and to a lesser degree Fannie Mae) to approve servicing transferees. The agencies are scrutinizing transfers carefully and are quick to deny consent for a number of reasons, including past history, financial condition or even the profitability of a servicer to them," the report notes with a bit of a raised editorial eyebrow. The Reserve report further notes that the upshot of such a stance is "lower liquidity for agency servicing, and [it] could affect the 'do-ability' of some deals." So, buyers are advised to check with these agencies before they bid on a package, "just to be sure their bid would be welcome."

As far as the Resolution Trust Corporation's (RTC) selling activities in the near term, the report notes that based on some logical speculation about the next round of thrifts to be closed, "it is likely another $50 to $60 billion will fall under RTC control in the near future."

Reserve's report gives the current RTC servicing sales apparatus modest kudos after giving them poor marks for their early performance. The report gets a slight jab in at the RTC's managing agents for selling its stockpile of servicing: "Unquestionably, there have been some slips and false starts, some scrambling and some stalling, (more by managing agents than by the RTC), but as of today, a workable selling system is in place."

The market report gives a synopsis of the servicing trends from five separate regions. The Central region now is netting high prices that are "thought by many to be better justified than other prices elsewhere," the report states. Even though this 12-state midwestern region tends to have lower loan balances than other regions, "costs are also low, and the product enjoys a high level of popularity - rivaling that of the Southeast. Servicing cost assumptions of $50 and price yields of 14 percent and less are not uncommon on top-quality conventional, nonrecourse servicing in the region."

Saying that servicers are attracted to the "relative economic stability" of what was fairly recently called the Rust Belt the report also notes that this region is not regarded as vulnerable to a sharp decline in prices because it escaped the "hyperinflationary periods" of other currently troubled markets. The report also notes that the Central region had the lowest weighted average foreclosure index of any region except the Pacific.

In contrast to the rosy news about the heartland's servicing prospects, the Northeast region got a rather dire writeup. "The Department of Commerce estimates that total unsold houses equal 13 month's demand, meaning recovery will be slow. At the same time, the RTC can be expected to release new properties into the markets, contributing to pressure on prices," the report notes in summing up this region.

Servicing from the Northeast faces "the hardest sell among regional offerings, with yields reaching as high as 18 to 20 percent for New England and New Jersey product."

Reserve's report states that "default probability is expected to remain high throughout the area." "As long as housing prices deteriorate, lofty foreclosure expectations will keep servicing values low on any kind of recourse, including GNMA MBS." But the commentators suggest that nonrecourse, conventional servicing may be undervalued here. The plus on this servicing is its low prepayments - a factor that may be holding prices for servicing from this region from completely falling through the floor, Reserve says.

Of the Southwest/Mountain region, Reserve says the market is "coming back strong (albeit from a very low starting point), but uncertainties remain about the effect of the RTC's planned home sales." The report notes that bad memories of VA no-bids still plague potential buyers of this servicing. "Many national players, burned in the past by oil-patch lending, continue to shun the region leaving better buys for regional traders." The report notes that the final quarter, 1990 delinquencies were down versus year-earlier levels, but perceptions have refused to accept this as fact. "Still, default expectations remain a good 50 percent higher than in the Northeast, despite the fact that a Texas loan originated after 1989 could claim better security than virtually any other," the report states. The upshot is, there is a shortage of buyers and an abundant supply of this servicing for sale, particularly from the RTC. "The combination of perceived risk and ample supply has driven prices down to levels yielding 16 to 18 percent and higher."

Finally, the report notes the "Southeast is the region of choice for many national servicing bidders, as confirmed by attractive price levels achieved in recent major trades." Yields on servicing packages from this region have been reported as low as 13 to 14 percent, Reserve says. Foreclosure expectations are modest and servicers like the high loan balances of the Washington, D.C. metropolitan region, plus the low cost of servicing in the South Atlantic and Gulf states.
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Title Annotation:Reserve Financial Management Corporation report: 'The 1991 Servicing Secondary Market'
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Article Type:editorial
Date:Jun 1, 1991
Previous Article:Economic trends.
Next Article:Structuring the perfect package.

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