May 16: IMBs, retained servicing, & taxes; CRM advice; co-issue & bifurcation: orange alert? “joke” about perspective

Now that we have everyone washing their hands correctly: Next week-turn signals!!! Speaking of turn signals, it always amazes me how interconnected things are. (How’s that for an understatement?) I know that this is a commentary on the residential lending biz, but for a moment let’s take the ripple effect in the car market. (Forget about gasoline usage, the need for mechanics, oil change shops, tire stores, etc., for now.)

People are using their cars less, so won’t be needing new cars for a while, even if they’re being offered 0% financing. And few people are renting cars, so not only are car rental companies in trouble, but what about the used car market, usually the outlet for ex-rental cars and expired leased cars? Concerns about further deterioration in U.S. used car prices are putting pressure on auto lease asset-backed securities. ThomsonReuters points out, “A key factor in value of auto lease ABS, as well as their car rental counterpart, is the residual value of vehicles when the lease expires. Used vehicle prices (a proxy for residual values) have plunged as Covid-19 social distancing measures since March have abruptly slashed the sales of new and used vehicles… Manufacturers are also offering enticing financing terms to sell brand new cars partly in response to the drop in used car prices. And there are concerns that a flood of used cars into the market if rental companies Avis and Hertz liquidate some of their fleet to ease their financial pressures may further depress used car prices.”

Servicing: why retain it?

Returning to mortgages, servicing is a hot topic, and I received these thoughts from an industry vet in Arizona. “During my decades in the mortgage industry, I have never understood why a non-bank would want to own MSRs. I know this is heresy to the mortgage industry and I have never run a mortgage company so maybe I’m missing something. Using the range of unlevered pretax returns of 7% to 12% you noted in your commentary Saturday, however, the after-tax return (using 35% for state and federal) range is 4.55% to 7.8%. I can earn more than that range in many bank preferred stocks today. MSR returns can be increased with leverage but then the risk substantially increases as bank financing is fickle (particularly when you most need the financing) and introduces the problem of owning long term assets with short term funding. Even the medium-term note market (for those who can access it) is fickle as Countrywide found out once one’s credit rating is downgraded.


“MSRs are substantially more attractive to banks due to their ability to safely leverage MSRs with core deposits and thereby earn double-digit after-tax returns on equity. Theoretically banks will always have a higher bid for MSRs than the value a non-bank places on its MSRs. Therefore, if I produced MSRs, I would almost always be a seller especially if looking at GAAP returns. For taxable income, however, originated MSRs create tremendous losses for tax purposes that offset serving and other income, which depending upon the scope of one’s production and origination, could produce zero current tax liabilities and significant deferred tax liabilities. It was long rumored that Countrywide never paid income taxes due to the huge losses (for tax) on production with servicing retained.”


“Rob, I own a medium-sized broker shop, and we are investigating CRMs (Customer Relationship Management software). Any advice?” Knowing that STRATMOR regularly advises a large number of lenders on CRM and other software, I turned to Garth Graham, Senior Partner. Garth replied, “Our CRM knowledge is focused more on Enterprise level solutions, but there are some things to keep in mind in determining the solution set for brokers and for all lenders. Whether you’re a mortgage broker or a mortgage banker, one needs to be clear WHAT you want it to do. Some lenders are trying to solve for top of funnel (having a good web site to lead experience, quickly respond to leads, having automated nurturing for new business….) and other might be more focused on providing highly automated status emails, and others might be more focused on post close relationship nurturing. Then the next lender is more interested in referral marketing, and nurturing Realtors.

“So, my quick answer is ‘it depends’, and it’s critical that the lender (not the vendor) determines what is important to them before picking a solution for their company. Then the fun part starts – trying to get adoption – which is another challenge, and often about how the system is rolled out, trained, and how well (and how easily) it delivers value to the LO and drives more business.” Thank you, Garth!

Agencies in transition?

“No crisis should go to waste,” and certainly the FHFA’s director, Mark Calabria, knows it. The jungle drums are saying more changes are ahead which could possibly shrink Fannie & Freddie’s footprint even farther through changing execution. But rumors often prove untrue.

Why should anyone care? Not that the FHFA would ever restrict co-issue or bifurcated execution or options for residential lenders, but I figured it would be good to have a refresher on the two, given all the tumult in the servicing markets.

For lenders that don’t service the loans they originate, one way to originate and sell Agency loans is to sell the asset to Fannie Mae or Freddie Mac (who don’t buy the servicing on loans) and sell the servicing elsewhere. There are companies that buy servicing, such as Lakeview, Pingora, Two Harbors, and Roundpoint are names often bandied about. Freddie Mac has a handy-dandy list of servicing buyers. If an originator that doesn’t service their own loans was cut off from selling loans to Fannie Mae or Freddie Mac through some type of co-issue execution, and instead be forced to either start servicing loans themselves or sell to an aggregator such as Wells Fargo, Chase, AmeriHome, or PennyMac, well, that would change things overnight.

Fannie defines co-issue as, “A concurrent transfer of servicing, or co-issue transaction, occurs when a selling lender transfers the servicing rights for a mortgage loan to a Fannie Mae–approved servicer at the same time it sells the loan to Fannie Mae. The seller gets paid by Fannie Mae for the loan asset and by the servicing buyer for the mortgage servicing rights (MSRs). The co-issue sale is considered an ‘automatic’ transfer because Fannie Mae’s prior approval of the transaction is not required. However, the co-issue transaction requires extensive coordination of data, documents, and cash settlement between the seller and servicer.”

Many lenders participate in bifurcation. A mortgage bifurcation refers to the separation of representations and warranties between the origination and the servicing of a mortgage. A bifurcated mortgage is a mortgage loan for which the current servicing entity is either not responsible for the origination representations and warranties, the previous servicing entity’s responsibilities or liabilities, or both. The entity that is responsible is the loan originator or previous loan servicer. The dividing of these representations or responsibilities between two entities creates the mortgage bifurcation.

Freddie Mac spells out some “in the weeds” mechanics here on bifurcation.

Dean Brown, CEO of Mortgage Capital Management, has some thoughts. “To increase originator’s ‘skin in the game,’ GNMA and Freddie & Fannie should allow a reverse co-issue execution, one where the originator keeps the servicing, books it at fair value (instead of selling it at effectively a negative number or zero value ) to an aggregator and sells the note to a securitizer who settles with the dealers with custom, bifurcated, or ‘stipped’ pools. The payment from the securitizer would flow through to the originator after the security settles. This would help the originator’s execution, help securitizers with more volume, and perhaps the originators could pay the securitizers a fee for renting their desk.


“Currently I am aware of an execution where a participation arrangement has been made wherebythe servicing rights have been transferred but not the ownership. These types of executions may be less important to have when the aggregators get their mind around servicing costs and liquidity in the pandemic market. I am all for having multiple execution strategies in every market environment as the recent one demonstrated so clearly why it is important.” Thank you, Dean!

Among questions currently being discussed in the industry are, “Are co-issue buyers creeping back into the market? Will the FHFA restrict this type of execution? What is servicing worth if no one can buy it? In a bifurcated scenario, what is the additional origination rep & warrant risk that the taxpayers would be burdened by if the originating entity goes out of business in a stressful economic environment?

Harken back to the autumn when Freddie and Fannie began to retain their earnings. There was, and continues to be, extensive focus on leveling the playing field for the fabled “private capital.” Unfortunately “private capital” is much more expensive than “public capital,” aka money from taxpayers. There were compelling arguments for revising policies at the GSEs and FHA in order to ensure equal access for private capital. The UST’s plan that came out several months ago “endeavors to promote private sector competition in the housing finance system” with proposals relating to the QM Rule, the PLS market, and GSE activities.

The US Treasury’s report recommended FHFA “tailor support for cash-out refinancings, investor loans, vacation home loans, higher principal balance loans, or other subsets of GSE-acquired mortgage loans” and “implement a policy and process for approval of the GSEs’ new pilot programs and other new activities or products, with that process soliciting public input.” Furthermore, the HUD report proposed Congressional limitations on FHA cash-out refinances, the adoption of a “sound risk-based capital regime for the MMIF, well above the statutorily mandated two percent capital ratio,” and asked Congress for direction regarding the viability of CRT for FHA loans.

No one should be surprised if constricting or changing the footprint of Fannie Mae, Freddie Mac, the FHA or VA programs involved eliminating or adjusting these channels.

Excellent perspective. Maybe we don’t have it that bad? It’s a mess out there now. Hard to discern between what’s a real threat and what is just simple panic and hysteria. For a small amount of perspective at this moment, imagine you were born in 1900.

On your 14th birthday, World War I starts, and later ends on your 18th birthday. 22 million people perish in that war. Later in the year, a Spanish Flu epidemic hits the planet and runs until your 20th birthday. 50 million people die from it in those two years. Yes, 50 million.

On your 29th birthday, the Great Depression begins. Unemployment hits 25%, the World GDP drops 27%. That runs until you are 33. The country nearly collapses along with the world economy.

When you turn 39, World War II starts. You aren’t even over the hill yet. And don’t try to catch your breath. On your 41st birthday, the United States is fully pulled into WWII. Between your 39th and 45th birthday, 75 million people perish in the war.

Smallpox was epidemic until you were in your 40’s, as it killed 300 million people during your lifetime.

At 50, the Korean War starts. 5 million perish. From your birth, until you are 55 you dealt with the fear of Polio epidemics each summer. You experience friends and family contracting polio and being paralyzed and/or die.

At 55 the Vietnam War begins and doesn’t end for 20 years. 4 million people perish in that conflict. During the Cold War, you lived each day with the fear of nuclear annihilation. On your 62nd birthday you have the Cuban Missile Crisis, a tipping point in the Cold War. Life on our planet, as we know it, almost ended. When you turn 75, the Vietnam War finally ends.

Think of everyone on the planet born in 1900. How did they endure all of that? When you were a kid in 1985 and didn’t think your 85-year-old grandparent understood how hard school was. And how mean that kid in your class was. Yet they survived through everything listed above. Perspective is an amazing art. Refined and enlightening as time goes on. Let’s try and keep things in perspective. Your parents and/or grandparents were called to endure all of the above – you are called to stay home and sit on your couch.

Visit for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Reducing Friction”, focused on operations changes. If you have the inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.


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Rob Chrisman