The Rise and Risk of Non-Bank Servicers
By Eric Mains
There was an interesting article written back in late 2015 discussing non-bank servicers that really deserves a second look, especially in light of Ocwen’s latest share price problems. The article discusses how in the last few years Ocwen and other non-bank Servicers have been raising capital in the markets by securitizing receivables (basically their fees for servicing the REMIC’s, i.e, their revenue). The receivable trusts they create are indirectly secured by the mortgage loans from the REMIC’s they service as collateral, since in a default situation once a home is liquidated the proceeds would go first to the servicer to repay the advances it made to bondholders.
Why would the REMIC’s be willing to secure these borrowings of a 3rd party with their collateral you ask? Again, the servicer’s are using these borrowed funds to advance payments TO the various REMIC’s they service to cover defaulted loan payments. The servicers don’t have much choice really, as their contracts/Trust PSA’s obligate them in many cases to advance these missed payments, and the kicker is the payments come out of their servicing profits. This mean if REMIC fund reserves run dry, or the servicer is having a bad year, they must find other sources to fund the advances until times are better. The irony is that the REMIC Trusts, which claim to have been monetarily damaged due to non-payment from homeowners on claimed defaulted loans, are in many cases NOT directly damaged thanks to these advances. The bondholders are still receiving payments as scheduled on the loans from the Servicers like Ocwen and Nationstar. See here for a nifty handout from one of the firms involved with putting these securitizations together: https://www.hunton.com/files/News/418cea88-6f14-4131-84b1-3e5f7fdb5f14/Presentation/NewsAttachment/87bee463-71dd-48bc-b92b-082d7f51ad8a/eligible_under_talf_03.23.09.pdf
The perverse thing if you notice in this handout, is these securitized receivable trusts can also be backed by TALF. Now if pressed in court, the REMIC Trustee may argue that they are obligated to repay servicers like Ocwen and Nationstar for these advances, but that is a far different matter. It goes without saying that nowhere in ANY mortgage note in the entire USA, did ANY homeowner agree that they would be obligated to a third party who chose to pay their “defaulted” loan payment, PERIOD. What obligation may or may not exist is a matter of fact and law for a court to decide, likely under equity principles such as unjust enrichment, etc., IF brought by the proper creditor claiming he is owed the money. If the REMIC Trust shows up in court to enforce a money damage claim against a homeowner in default, then the very basis of being the real party in interest to the claim is that the REMIC Trust has not been paid according to the mortgage note. If the REMIC has been paid by servicer advances, then the Trust is indisputably NOT the real party in interest. How can I say this? Because the aforementioned article points out the REMIC’s aren’t the parties borrowing the money that they are receiving the benefit of the payments from,“Non-bank servicers must borrow money to advance interest and principal payments on delinquent loans. Unlike banks, they cannot rely on cheap deposits for funding.”
The SERVICERS have now become the real parties in interest, because they, AND THEY ALONE, have obligated themselves by making these payments FROM THEIR OWN FUNDS WHICH THEY HAVE BORROWED. By borrowing the money in the market in THEIR names, NOT THE REMIC TRUST’s, they have become an intermediary party in the transaction, and most importantly they have done so outside of the terms of the mortgage note. You tell me, ever see a subrogation clause anywhere in your mortgage note? No? Well neither has anyone else in the country. The problem that is starting to be recognized by courts in California with Yvanova, and in New Mexico with Johnston, is that the monetary obligation under the note is becoming separated from the security interest, negating standing and real party in interest claims. This is something Adam Levitin, Elizabeth Renuart, and others warned of time and time again, and is why the Johnston decision is replete with quotes from them.
The article also relays the fact that the money borrowed from the investors is based on the non-bank servicer’s credit rating, NOT the REMIC Trust’s. I am sure the servicer will claim its position is backed by collateral which it does not own, basically IOU’s from the REMIC’s who may have severe issues foreclosing on the collateral because of the mentioned standing issues as pointed out in Johnston. Still, that does not negate the fact it is the non-bank servicer’s bacon on the hook, and the creditor is basing its revolving loan partially on the non-bank servicers credit quality. See, “The new deals have new features to address S&P’s recalibrated rating methodology, which takes into account the potential for extended timelines for reimbursements, the liquidity risk of the notes under stressed conditions, and the servicer’s ability to continue advancing based on its credit quality.”
So not only is the REMIC who claims to hold your loan, and is claiming in court that it is the real party in interest who has been monetarily damaged by supposed non-payment, NOT on the hook for the money the Servicers are borrowing to pay them (outside of homes they hope they can liquidate as security to pay the advances), but the REMIC’s have been collecting money from settlements on top of this as well. These settlements could be paying down defaulted loan principal well before any foreclosure sale takes place. Further, the payments may be applied during the time the servicer and REMIC are representing to a court that they are owed the full loan balance and other fees. On that note, please see the article here from the first of the year regarding a recent IRS PLR, http://www.dentons.com/en/insights/alerts/2016/january/11/irs-issues-private-letter-ruling-regarding-remic-trustees-entering-into-settlement-agreements
“On December 31, 2015, the IRS released PLR 201601005 (dated April 8, 2015), which addressed the previous uncertainty on the ability of Trustees in real estate mortgage investment conduit (REMIC) transactions to enter into settlement agreements with a mortgage originator or master servicer on a large-scale basis, as opposed to a deal-by-deal basis, for certain breaches of representations and warranties made by such parties relating to the mortgage loans securitized in such REMICS and the receipt of an allocable share of such settlement funds by the different REMICs (the “Taxpayers”). While this PLR addressed several specific technical issues, the IRS generally found that the Taxpayers would not lose their status as REMICs due to the Trustee’s execution of such settlement agreements and the receipt of a portion of these settlement funds to different REMICs…..If the concept of a subsequent recovery was not contained in the governing documents, then the payment of such Allocable Share was distributed as if it was an unscheduled payment of principal…..The IRS found that since the receipt of the Allocable Share arose from the mortgage loans as well as each Taxpayer’s status as a REMIC, the Allocable Share should not be considered as a contribution of cash to the REMIC or as a prohibited transaction.”
You heard it here folks, those billions of dollars of settlement payments to investors: They arose from your mortgage loan, and further the IRS said, “Well, even though you got Billions of dollars, that isn’t actually cash, no, no, no, that’s just an unscheduled principal payment on your loan.” Really? Quick, someone run and tell the judge that I demand credit for not only the servicer advances received by the REMIC trust claiming damages on my loan, but also for the loan principal payments applied to my account as well. Want to claim I don’t have standing to raise the PSA/litigation issues regarding 3rd parties, guess what? I’m not. The PSA has nothing to do with it. The IRS just said the payment of the award AROSE FROM THE MORTGAGE LOAN, NOT THE PSA OR REMIC…so not only do I very much have standing to claim a right of set off for THE PRINCIPAL REDUCTION APPLIED TO MY MORTGAGE LOAN, the IRS just verified I have standing as this is how it is being accounted for by the REMIC.
Now if all this is not disturbing enough, take a step back to the article and keep in mind what’s been going on here with a very financially shaky Ocwen. If Ocwen can’t pay back the money it borrowed from investors to advance payments on loans in default, many of which will be active in the courts for years, where does repayment come from? Supposedly the servicer advances from entities like the HLSS Trust in the article would be backed by the liquidation of the mortgage notes. If Ocwen were to go bankrupt, then we would have Ocwen’s creditors claiming they have the rights to the proceeds from your liquidated home at some date, right? Not so fast… in a recent case from the bankruptcy court in the ND of IL, a judge recently ruled that debtor payments to a REMIC Trust handled through a non-bank servicer may be subject to avoidance and turnover to a BK Trustee potentially. http://www.alston.com/advisories/remic-trust-payments/ and here http://business-finance-restructuring.weil.com/avoidance-actions/safe-no-more-court-vacates-opinion-safe-harboring-remic-payments/
“In April 2015 Judge Jacqueline P. Cox (U.S. bankruptcy judge for the Northern District of Illinois) issued an opinion that broadly interpreted the safe harbor provisions of Bankruptcy Code Section 546(e) in the context of payments on loans securitized using real estate mortgage investment conduit (REMIC) trusts……. In short, Judge Cox held that payments by the debtor to a bank that was the master servicer of a REMIC trust (which included a loan on which a debtor-affiliate was obligated) were protected by the Section 546(e) safe harbor because all elements of the statute were satisfied: (1) the payments were made to a financial institution; and (2) the payments were made in connection with a securities contract. The court held that full satisfaction of Section 546(e) warranted dismissing Count VI of the trustee’s complaint (the count for avoidance and turnover of the payments).
After the bankruptcy court issued its memorandum decision and proposed findings of fact and conclusions of law, the defendants in the underlying adversary proceeding filed a statement disclosing that certain facts upon which the court relied were not accurate. Defendant’s statement revealed that the master servicer for the loans held by the trust during the relevant time period was not KeyBank but an affiliate, KeyCorp Real Estate Capital Markets, Inc. (“KRECM”), which defendants acknowledged was not a financial institution, as defined in the Bankruptcy Code. In light of these new facts, the trustee sought a stay of its appeal and moved for reconsideration of the court’s ruling. Nonetheless, defendants in their opposition to the motion for reconsideration sought to argue that the transfers at issue were still made to, or for the benefit of, a financial institution because they were made to, or for the benefit of, the trustee of the Trust (Key Bank), which held legal title to the assets of the trust under the Pooling and Servicing Agreement……Citing the defendants’ disclosure of “material evidence/information that undermines the court’s previous rulings, the court vacated its opinion and order, and granted the trustee leave to file a Second Amended Complaint.”
So what happens if a potential creditor finds out the payments non-banks like Ocwen or other servicers made to the REMIC’s could be potentially clawed back and put in the BK pot? What if the same happens with the liquidation proceeds supposedly payable to Trusts like HLSS? What if more rulings like Yvanova and Johnston means the REMIC’s don’t have standing to liquidate homes in foreclosure, OR the REMIC’s servicers (Like Ocwen) or the Trustee’s face massive liability for wrongful foreclosure if they do liquidate without being proper creditors?…how you going to get that advance money back? Who is liable to whom?
Like I said in my previous article https://livinglies.wordpress.com/2016/03/04/fertilizer-for-the-garden-of-a-proposed-new-eden/ this mess will be with us for decades. Regulators and courts can no longer ignore the problem, nor will an increasingly belligerent public let them. Homeowners have a right to a credit for part of the settlement funds that have been flowing to everyone but them (P.S, for a fun graphic on where that money did go, see here http://www.wsj.com/articles/big-banks-paid-110-billionin-mortgage-related-fines-where-did-the-money-go-1457557442?mod=e2fb ), and they do have standing to claim it. My prediction is we will not only see the onion get peeled back in the next 5-10 years as to things like servicer advances and the application of payments to REMIC’s, but we are going to see quite a few more implosions of supposedly “safe” but unrated investments cooked up by non-bank servicers like Ocwen and Nationstar.
Mortgage Servicers Resume Securitizing Repayment Rights
By Nora Colomer
August 25, 2015
Residential mortgage servicers are once again tapping the securitization market to fund advances to bondholders. Servicing residential mortgages, particularly those issued before the financial crisis, is capital intensive. Non-bank servicers must borrow money to advance interest and principal payments on delinquent loans. Unlike banks, they cannot rely on cheap deposits for funding.
But issuance of term securities backed by repayment rights came to a halt in April of last year, when Standard & Poor’s announced it was revising its criteria for evaluating the risks in deals.
This meant that servicers had to rely on private, unrated deals or shorter-term variable funding facilities. S&P published its revised criteria in October, but the first rated deals have only come to market in the last few weeks.
There are some new features that issuers have to build into servicer advance trusts under the new rating criteria but, “it’s been workable and issuers are finding ways to get deals done that work,” said Tom Hiner, a partner at law firm Hunton & Williams who has advised on a number of such transactions.
New Residential Investment Corp. is currently in the market with a $1.5 billion deal dubbed NRZ Advance Receivables Trust 2015-ON1. The real estate investment trust recently acquired the assets of Home Loan Servicing Solutions (HLSS) from Ocwen Financial; this deal refinances two existing securitizations, HLSS Servicer Advance Receivables Trust (HSART) and HLSS Servicer Advance Receivables Trust. The advance facility is backed by reimbursement rights to private label mortgage backed securities.
In June, Ocwen completed $450 million servicer advance refinancing of its Freddie Mac financing facility (formerly OFSART). The transaction securitizes the reimbursement rights to funds advanced on mortgages insured by the government sponsored enterprise. S&P’s ratings on the notes issued by the deal, Ocwen Freddie Advance Funding (OFAF) LLC’s series 2015-T1, 2015-T2, and 2015-VF1, ranged from ‘AAA’ to ‘BBB’ and pay a weighted average interest rate of 2.225%.
In a July conference call discussing second quarter earnings, Ocwen executives said the deal was positively received; it was upsized by $50 million and the advance rate on the notes was 8 percentage points higher than the facility it refinanced. Hiner expects much of the market activity in the next two quarters to come from refinancing portions of the often unrated variable funding note commitments extended by bank lenders during the S&P moratorium on rating deals with term ABS.
This trend could result in a total of 10 to 12 term ABS deals by the end of the third quarter, according to Hiner. The new deals have new features to address S&P’s recalibrated rating methodology, which takes into account the potential for extended timelines for reimbursements, the liquidity risk of the notes under stressed conditions, and the servicer’s ability to continue advancing based on its credit quality.
Timelines are further adjusted based on the actual recent experience of the servicer in recouping advances. The criteria establish “standard” reimbursement curves along with “above standard” and “below standard” ones for different advance types and rating scenarios. The new methodology also includes a more stringent liquidity reserve fund requirements; this requirement varies according to the geographic diversification of receivables in the master trust.
“In a high stress scenario, you could have potential issues where you didn’t receive cash from the receivables because you may not be liquidating properties as quickly,” said Jeremy Schneider, the agency’s director of RMBS ratings. Hiner also expects to see more additional deals backed by repayments rights to advances on agency mortgages, similar to Ocwen’s. While servicing mortgages guaranteed by Fannie and Freddie is not as capital intensive as servicing non-agency mortgage securitizations, Hiner thinks that more participants with agency servicing portfolios will look to the ABS market for funding.
S&P’s older criteria for rating servicer advance receivables securitizations was not tailored for agency RMBS, simply because it had not seen many deals backed by IOUs from Fannie and Freddie. “But now there is more of an appetite,” said Waqas Shaikh, S&P’s managing director for RMBS ratings. The new criteria takes this into account. Nationstar is the only other issuer to previously place agency notes under its Nationstar Agency Advance Funding Trust in January 2013.
There might not be any more deals from New Residential, however. The REIT said during its second quarter earning call that it has $3.5 billion of additional financing to fund increased balances of servicer advance receivables and upcoming maturities. The company acquired $5.1 billion of reimbursement rights through its purchase of HLSS; its portfolio now totals $8.5 billion.
And Ocwen, which has so far sold $66 billion of agency MSRs, is in the process of selling another $25 billion, according to its second quarter earnings report. However the issuer intends to remain in the agency space. On the company’s April 30, conference call to discuss operating results for the first quarter 2015, Ron Faris the CEO said Ocwen did not intend to sell any of its Ginnie Mae MSRs and would not completely exit GSE or servicing or lending. The issuer still has $34 billion in GSE servicing rights and approximately $8 billion of GSE subservicing, and plans to continue to originate and service new FannieMae, Freddie Mac and FHA loans.
Ocwen executives remain “optimistic” that the company will eventually be able to resume purchasing mortgage servicing rights (MSRs) based on discussions with the New York Department of Financial Services and the California Department of Business Oversight. The servicer’s ability to acquire new MSRs is currently restricted as part of last year’s settlements with the two regulators over its practices.
Once purchases resume, Ocwen plans to partner with New Residential to either help finance the purchases or finance any funds that must be advanced to mortgage bondholders as part of the servicing. This is similar to the arrangement that Ocwen had with its Home Loan Servicing Solutions affiliate before it sold that business to New Residential. HLSS often turned to the securitization market to finance these advances.
“They [New Residential] would be definitely one of the first financiers that we would go to,” said Michael Bourque, Ocwen’s chief financial officer. Typically servicer advance master trusts are structured with two components: variable funding notes (VFN) and term asset-backeds securities. A VFN is essentially revolving line of credit that is typically placed with one or a handful of banks or other institutional investors. It can be drawn and paid down, sometimes within the same month, to fund the servicer’s advance activity. This component of servicer advance securitization trusts continued to be issued in the private market without ratings while S&P reviewed its ratings criteria, since it is privately negotiated between lender and borrower.
For example, on June 15, PHH Corp. said it issued $155 million of VFNs under its PSART servicer advance securitization trust, in a transaction with Wells Fargo Bank. A portion of the proceeds from the transaction was used to repay in full all outstanding VFN previously issued by PSART to The Royal Bank of Scotland in March 2014.By comparison, term ABS is typically placed with investors via an offering process, and is typically rated. Hiner believes that issuers that increased their reliance on VFN while S&P reviewed its ratings criteria will now look to refinance some of these notes as term asset backed securities. “Over the last year we’ve seen advance funding coming primarily from revolving bank financing,” said Hiner. “With the market for term ABS back, the efficiencies of the master trust structure produced by its pairing of revolving VFNs with term ABS is becoming available again.”
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