What does servicers mean in the mortgage industry?

[danielkan2000]

In 6a page 13, you give us an example
Originator = HSBC
Servicer = JP Morgan
Arranger = Countrywide Financial

Step1. HSBC first lends me (a borrower) money to buy a house (a mortgage contract has been signed)
Step2. HSBC hires Countrywide Financial to repackage those mortgage contracts into securities
Step3. Countrywide Financial also helps HSBC to sell those securities to asset manager
Step4. HSBC hires JP Morgan to distribute all the cash flows of those FI securities
Step5??
Step6. Investor are indirectly buying those securities through investing on the mutual funds

Question1. I am not sure about Step5
Question2. What is the role of Warehouse Lender? can you give me a real world example
and correct me if I make any mistakes

Thanks

Dan

 

[David Harper CFA FRM]

Hi Dan,

I tried to follow the Ashcraft case study and I think one challenge is the difference in perspectives between a (i) "physical chain" of linkages (just like your steps) and (ii) the related *frictions* that are the focus of the case; where frictions can arise between any two parties that transact, so there can be more frictions than steps... keeping that in mind (that we have two perspective, the securitization chain and frictions)...

Step 1: Agreed. I have HSBC as the "illustrative" originator; in the case, it's the now bankrupt New Centrury Financial. In any case, this is the ground zero retail: you (BORROWER) are underwritten by the ORIGINATOR

Step 2: Agreed, although frankly I cannot recall why I have Countrywide as the illustrative *arranger*; in the case, Goldman Sachs is the arranger. But just as you say: arranger funded by warehouse lender (if not internally) ... and then, the arranger will setup the securitization by selling the pool into the special purpose entity (SPE)

Ashcraft: "The arranger is responsible for funding the mortgage loans until all of the details of the securitization deal can be finalized. When the arranger is a depository institution, this can be done easily with internal funds. However, mono-line arrangers typically require funding from a third-party lender for loans kept in the “warehouse” until they can be sold. "

Step 3: right, the Arranger (Goldman in the case. Goldman is more natural than Countrywide, again. Sorry) hires and works with the rating agencies. This is the heart of the controversy right? The arranger would say "how much enhancement do i need for AAA" and they work backwards from a target rating...

Step 4 and 5: To my original point above, these are two *frictions* that related to the servicer (I have JP Morgan as a servicer b/c they are a big player; in the case, the servicer is Ocwen) ... the arrrow to the borrower refers to MORAL HAZARD friction between borrower and servicer. See PAGE 12 in the case...but also, I sort of glossed over this until I read about it lately. If you want some real color on servicer moral hazard, see links in my second bullet here, the Baseline Scenario has excellent post and links: http://www.bionicturtle.com/learn/article/this_week_in_frm

Step 6. Yes, could be, although the bent of the case is more institutional than retail. So with friction #6 I think they have in mind an institutional agency; e.g., a pension fund or endowment investing with an asset manager who buys the securities.

Question 1: hopefully, the friction-vs-step clarifies. The servicer actually has three "frictions" in the case: servicer versus borrower; versus asset manager; versus rating agency (I guess there are servicer quality ratings, which frankly I did not know?)....
Question 2: I'm not current on the space frankly. It has cratered with exits this year. I think Wells is a player (?), I consulted to a couple a few years ago but both have been acquired. You might try: http://www.warehouselendingproject.com/home

David