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Boardroom view.


The servicing side of the business came under serious attack last month. It was bad enough that a senior member of the House and the chairman of the banking committee deemed it a good idea, on the basis of fairly limited discussion, that every servicer should pay 5.25 percent interest on all escrow accounts, regardless of how it would change the economics of home lending for the consumer.

But on top of that, the FDIC acted on the enormous power given it by the thrift bailout law and, in essence, tore up a year-old contract for purchased servicing of whole loans and was going to reclaim the servicing without any compensation to the buyer.

For those eyeing the high-yield business of servicing from the outside, those two actions should have given them some pause. Both actions were all the talk at the recently concluded annual convention of the Mortgage Bankers Association of America (MBA) in Dallas.

The topic understandably crept into the discussion at panels devoted on the program to other topics. At a panel titled "The Competitive Environment: How Capital Adequacy is Changing the Marketplace," Laurence Platt, partner with Brownstein, Zeidman and Schomer, Washington, D.C., said that with the recent FDIC action repudiating the purchased servicing contract between Sears Mortgage Corporation, Riverwoods, Illinois, and Miami-based Southeast Bank, N.A., it has underscored the fact that the issue of "buyer beware' still exists in this context because of the risk of repudiation." Platt added that under this broad power invested in the FDIC, both termination fees in servicing contracts and representations and warranties in these contracts can also be wiped out.

He pointed out, furthermore, that buyers of servicing from weak depository institutions headed for RTC or FDIC control have no recourse if they encounter a contract repudiation other than to stand in line with all others awaiting compensation. Platt explained that managing agents running the banks and thrifts taken over by the government have a duty to maximize the benefits to these institutions and to minimize the liabilities. If they see a prior sale of assets from those institutions that they perceive as a hardship, or not the best return to the government for those assets, then under the law, they have a duty to wipe out the deal.

Platt noted that the RTC is "vacuuming up whole loans from failed thrifts and securitizing them under its Ritzy Mae" securities-issuing program. That could mean that servicing on whole loans could be more susceptible to being called back from purchasers who got those assets for a modest price from failed institutions now in government hands.

Those in the market to buy servicing rights from either the FDIC or the RTC have to be wondering how they can protect these purchases from being reclaimed by the government. Platt offered some advice. He said, "The best way to get the government to change its policy is to have a sitdown strike in purchases." Or, to put it more bluntly, he said, "Just don't buy from troubled institutions." But Platt acknowledged that the problem with that is there is always someone willing to buy, so that a total economic boycott is probably impossible. He said the next thing that servicing purchasers can try given this new risk of repudiation is to "price the risk." But the flaw in this approach, he added, is that some competitors bidding for the same servicing may not see or price the risk accordingly, and thus their bid will end up as the lower and winning bid.

Platt said another approach to deal with the risk of contract repudiation would be to try holdbacks - or write into the contract that part of the purchase price will be withheld by the buyer to cover the possibility of repudiation. But Platt quickly observed that "if the contract itself is repudiated, it would be hard to do holdbacks." The other advice he offered to the audience was "If you are going to service for a troubled institution, I wouldn't advance much money."

Platt counseled buyers of servicing to "know your sellers, and avoid those who aren't in capital compliance." He added that he was "surprised to see so many due diligence teams don't know how to measure the capital compliance of the sellers." The mortgage banking attorney also advised servicing buyers to "pressure brokers selling on behalf of an institution to disclose the capital position of the institution." Platt noted that disclosure documents for the sale of servicing have yet to get to the same level of disclosure as other asset-sale disclosure documents, and buyers need to exert pressure to get more detailed disclosure, particularly in light of these new developments.

If all of that discussion does not make you rethink big purchases of servicing from depository institutions, perhaps the recent actions of Representative Henry Gonzalez (D-TX) will. On October 10, Rep. Gonzalez introduced H.R. 3542, which, among other things, requires servicers to pay 5.25 percent interest on all escrow accounts "established or maintained" after the bill's enactment. As of October 25, five other members of the House Banking, Finance and Urban Affairs Committee, which Gonzalez chairs, had co-sponsored the bill. Those members are Representatives Bruce Vento (D-MN), Charles Schumer (D-NY), Barney Frank (D-MA), Gerald Kleczka (D-WI) and Kweisi Mfume (D-MD).

The introduction of the bill immediately prompted a three-page letter to the top 100 mortgage servicers from the new MBA President Angelo R. Mozilo. The letter stated, "Enactment of this legislation will seriously erode the value and profitability of mortgage servicing portfolios. I urge you to get personally involved and to contact your representatives to discuss the ramifications of this legislation. The issue is positioned as a perfect |consumer' issue which may appeal to many Members of Congress on fairness grounds, unless they understand the complex ramifications of this legislation, particularly because of its retroactive nature."

Mozilo has also sent a similar letter to all MBA members encouraging a grass-roots lobbying appeal to Congress to allow a hearing on the broader policy issues involved with escrows. With such an appeal, industry witnesses could detail the risks to consumers and taxing jurisdictions of derailing the current system, and HUD, too, could offer its views. The letter notes that a House subcommittee held a hearing on escrows in March but the testimony was confined to complaints about the current practices for escrowing by a group of state attorneys general and consumer groups. Because of congressional ground rules, the earlier subcommittee hearing could technically suffice for holding a hearing before moving to markup on actual legislation. If Gonzalez takes that route, then the industry would be faced with battling a moving target that appeals to consumers' pocketbooks in a pre-election year legislative session. To prevent that from happening, MBA is urging the importance of another hearing on escrows to key lawmakers and asking MBA members, and in particular, large servicers, to write their representatives to seek their pledge not to cosponsor the bill.

The good news on the horizon is that the banking reform legislation is foundering in the House. As one Capitol Hill observer noted, this works to the benefit of the mortgage servicing industry in terms of the escrow bill, because it dims the prospects for getting that bill on a fast track any time soon. The banking bill is taking up so much additional time because a brand new, stripped-down version must come back up through the pipeline, so there is little time to move to markup on H.R. 3542 - the escrow bill. So it appears unlikely there will be an additional hearing on the escrow matter before Thanksgiving. When and if Congress returns after Thanksgiving, then all bets are off as to what happens with this critical legislation.

Janet Reilley Hewitt Editor in Chief
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:threats on mortgage banking industry's servicing sector
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Nov 1, 1991
Previous Article:Economic.
Next Article:The customer satisfaction strategy.

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