| Servicing is key - the role of third party players |
back |
|
By: Paul Fenn, Paul Fenn
|
| As European residential mortgage-backed securitisation (RMBS) issuance continues to grow over the coming years, Paul Fenn writes that third party servicers will play a full part in helping lenders tap this important source of funding. |
Residential mortgage-backed securitisation (RMBS) issuance in Europe grew by 350 per cent in the five years to 2006, to top €250 billion last year, according to statistics from Fitch Ratings. By number of transactions, growth was in excess of 50 per cent. By any measure, this is a flourishing market as lenders continue to tap a readily available source of willing international investors with an appetite for rated mortgage assets.
Within Europe, the UK is by far the largest market for RMBS activity, followed by Spain, the Netherlands, Italy and Ireland. The UK also has the most developed third party mortgage servicing industry, which has prospered partly on the back of the growing number of new entrant specialist lenders that often choose an outsourced solution for their loan servicing and fund themselves via RMBS issuance. As the largest player in the UK and Irish mortgage outsourcing market, HML handles the assets of around 40 lenders, with a client list that continues to grow: we now manage mortgage books totalling close to €70 billion, and a high percentage of our clients' securities.
The advent of Basel II, focusing lenders' attention increasingly on the risk profile of their mortgage books, will encourage further growth in RMBS issuance throughout Europe, both to manage risk and achieve competitive funding costs. This growth is likely to feed through into greater business volumes for servicers, who can provide a bespoke solution specifically to meet the needs of the lender's securitisation programme.
Some of Europe's larger mortgage lenders have built in-house servicing capabilities to support their securitisation programmes, but new entrants, or lenders that may only securitise certain specific portfolios need to make a choice: do we service in-house or use a specialist outsourced third party provider?
The servicer, whether in-house or outsourced, performs a number of key functions: customer servicing, cash collection, arrears recovery, quality control, compliance and timely and accurate reporting.
Of paramount importance is cash collection. Without proven robust and controlled collections processes, the payments cannot be collected from the customer, the performance of the portfolio maintained and the benefit passed to the investors.
Each payment received from the customer is subject to a 'waterfall of payments', which is the order in which the payment must be split across fees, expenses, interest and capital. This can prove a challenge for some platforms that cannot facilitate such a split and impact the speed at which accurate MIS can be provided.
In order to achieve the highest credit quality and lowest cost of funding, each securitisation involves a due-diligence process to ensure that the note holder's position is as water-tight as possible. At HML, for example, a full post completion quality check covering every aspect of system held data can be performed to ensure once the pre-securitisation due diligence takes place the lender can be confident that the data for the loans to be securitised is accurate. We can also perform a full title check, another feature that helps satisfy the auditors when they scrutinise the servicer's systems and procedures.
The post completion quality check is of course only the start of a continuous process of review and audit to ensure all loans are being serviced to the highest possible criteria. The lender must have complete confidence that the servicer can perform these tasks to the highest specification.
From time to time some customers will fall behind with payments either through financial mismanagement or hardship. It is essential that the servicer works quickly to ensure the correct recovery techniques are applied depending on the level of risk. The objective of all collections teams should be to ensure the risk is being managed and in all possible instances the customer returns to a performing status.
Lead banks and ratings agencies, in most instances also require contingency arrangements to protect note holders' interests in the event of business interruption of any of the parties - therefore standby servicers and standby cash/bond administrators are appointed, whether the assets remain serviced in-house or are outsourced.
Having looked at the requirements of servicing for a securitisation programme, we now come to the question - how should lenders approach outsourcing?
For the larger scale lender, in-house servicing has the merit of allowing direct contact with the whole process, whether the process forms part of the lender's 'core skills' or not. It potentially allows greater interface with customers which, in theory at least, facilitates spin-off business and cross sales. However, the ability to segregate securitised portfolios and outsource them to a third party servicer enables the large scale lenders to focus their attention on the origination of new quality assets, fuelling future securitisation programmes.
On the other hand, for start-up lenders or for firms that are just planning to securitise certain portfolios, hiring in the various skills for servicing, and developing the IT functionality needed for a successful securitisation programme can be tough, time consuming and expensive.
A third party servicer can help reduce the lender's set-up outlay and the capital investment needed, and can offer fully variable costs even though the initial size of the securitisation programme may be small or it may fluctuate over time. In effect, the lender can benefit from economies of scale even in a start-up situation.
As for any concerns over control, the contractual relationship between lender and servicer should be robust enough to cater for all lender and issuer expectations. This legal basis gives the lender a high degree of certainty that the servicing function will perform at least as well, and in many instances better than would be achieved within a lender's own platform.
Lenders looking to outsource servicing for a securitisation programme should also consider whether or not the servicer is rated. The rating agency will asses the servicer's ability to process loans and mitigate losses based on specific criteria and data collated from the servicer. The higher the rating, the better the service provided, allowing an independent assessment of the servicer and providing additional comfort to the lender.
Third party servicers specialise in administering the mortgage assets of lenders and ensuring they meet the specific requirements of their securitisation programmes. To be blunt, we live or die based on the service we provide. The lender benefits from a level of knowledge, expertise and flexibility from the servicer that would be hard to replicate in-house. In a start-up situation, they facilitate speed to market more quickly and at lower cost.
As European RMBS issuance continues to grow over the coming years, we can be sure that third party servicers will play a full part in helping lenders tap this important source of funding. |
Paul Fenn is a development director with HML-Homeloan Management Ltd.
|
|
|
|
