US LOAN SERVICES APRIL 2016 NICK OLDFIELD / TOBY WELLS
US Mortgage Servicing Market $10 trillion in New Business mortgage debt outstanding, with more than $1 trillion in new originations each year Corporate Branding $30 billion + in annual servicing Client Retention, revenues Satisfaction & Improving Less than 1% Margins of overall market; significant growth opportunities in key service areas Since ownership returns have consistently exceeded CPU’s cost of capital 2
U.S. Mortgage Servicing Recap The management and administration of mortgage Agency Servicing (Govt Sponsored Agencies) - loans and adherence with loan documents and various Generally higher credit quality and regulatory requirements. It includes: conventional/conforming loans. › Low risk of default › Billing, collection and processing of payments › Low cost to service and minimal servicing advance › Management of customer enquiries requirements › Monitoring of tax and insurance What is › Low servicing and subservicing fees › Management of client bank accounts Mortgage › Acquisition of mortgage servicing rights (MSRs) have › Managing loan modification process as alternatives Servicing a higher value or multiples of servicing fees to foreclosure › Results in less risk or discount rate or return › Supervising foreclosure, bankruptcy and property requirements dispositions Private Securitizations – Generally lower credit quality and/or higher loan-to-value non-conventional/ non-conforming loans. › Higher risk of default Sources of › Higher cost to service and increased advance Mortgage Servicing Rights (“MSRs”) are intangible requirements Mortgage assets that we acquire for cash and which provide the Servicing › High servicing and subservicing fees with lower legal right to service a particular mortgage for a fee volumes of loans serviced for the duration of its life. We hold these assets on › Acquisitions of MSRs trade at lower multiples of our balance sheet and amortize them over 9 years. servicing fees Sub-servicing refers to a contractual relationship Whole Loans – Generally not securitized, and owned with the owner of a MSR or Loan, whereby the owner Types of by a single investor, which tends to be a hedge fund or would appoint us to service their loan for a fee for the Mortgage financial institution that does not have captive or period of the contract. We perform sub-servicing for Servicing affiliated servicers. banks, hedge funds, bond insurers, GSE’s. Sub- › Whole loan portfolios can be composed of many servicing business can be lost through a sale of the types of loans underlying MSR or loan or through a desire of the › Servicing fees are generally based on the status of owner to change servicing provider for whatever the loan & the servicers are often entitled to reason. Mortgage servicing broadly covers three incentive fees for loss mitigation activity different type of mortgages. › Loan owner owns the MSRs 3
Mortgage Servicing Key Terms › Servicing of a mortgage which is less than 30 days delinquent. Typically loans that Performing Servicing meet the criteria of the Government Sponsored Entities. › Servicing of a mortgage that is over 30 days delinquent up to management of the Non-Performing Servicing foreclosure process. Typically, non-performing servicing is performed over loans subject to private securitizations. › Intangible assets representing an ownership right to service the mortgage for a fee for Mortgage Servicing Rights the life of the mortgage. The owner of the MSR can either service the loan itself or appoint a sub-servicer to do so. › The owner of the MSR is required to fund various obligations required to protect a mortgage if the borrower is unable to do so. Advances receive a priority in any Servicing Advances liquidation and are often financed in standalone non-recourse servicing advance facilities. › Otherwise known as Fannie Mae, Freddie Mac, Ginnie Mae that enable originators to recycle capital. Government Sponsored › Buy loans from originators subject to certain lending criteria and guarantee timely Entities (“GSEs”) payments to bondholders. MSRs created during the sale process can be either retained by originator or sold. › Alternatively, mortgages not sold to GSEs, are aggregated and sold as privately owned Private Securitizations securitized pools. Third party servicers are often appointed or able to acquire the MSR pertaining to these pools of loans. › An Excess Strip Sale refers to the sale of a stream of cash flows associated with the servicing fee on a performing MSR. The seller of the servicing strip has the ability to service the mortgage. Part Owned MSRs › An SPV deal refers to the sale of the rights to the MSR and associated servicing advances into an SPV. CPU typically takes a 20% equity stake in the SPV and performs all servicing on the loans via a sub-servicing fee for service relationship. 4
Addressing our strategic challenges Why we need to Strategic Challenge Impact of CMC address 1. We need to acquire MSR in › Drive scale › Co-issue program provides volume at the best possible › Manage run-off steady flow and avoids bulk price › Enhance RoIC auction pricing › Provides access to new servicing opportunities earlier in cycle 2. We need to grow our sub- › Capital light › Provide multiple cross sell servicing business at a similar › Helps drive scale efficiencies opportunities rate to the growth in our and maximises RoIC › Key clients are large owned business performance consumers of sub-servicing business › Expected to deliver steady 3. We need to manage risk that › High concentration driven by replacement flow of new legacy sub-servicing could fall GFC settlements business away › High oversight costs › Provides access to over 200 combined with reducing clients and opportunity to portfolio could encourage further diversify servicing MSR owners to sell portfolio 5
US Mortgage Servicing Strategy Our objective is to build a capital light servicing business able to support all parts of the mortgage cycle. We are investing in building We do not nor do we intend to our fulfillment capabilities. originate loans however Originate Fulfill This can be a lead in to partnerships with originators are key servicing opportunities, both to our overall strategy, both in sub-servicing and MSR terms of driving new owned and purchases. CMC Co-Issue sub-serviced business and in program will help drive greater potentially directing recapture performing servicing business. Areas of development business. focus – where the bigger Performing Recapture near term opportunities lie Servicing Current strengths and Asset management (of SLS’ core business is capabilities – limited near foreclosed properties) and debt special servicing. This is recovery are closely aligned what drives the large term growth potential with special servicing and an compliance costs and integral part of SLS’ core regulatory risk, due to the Special Recover business. Our plan is to seek sensitivities around the Servicing to sell these services to 3 rd borrowers personal parties. situations. Asset Manage 6
Why does CPU believe it can be successful in this industry? Mortgage servicing is a market we know well. The core competencies and market requirements align extremely well with our strengths, capabilities and service suite. Range of Requirement for Strong technology stakeholder scale data requirements communication processing needs Treasury management & Heavily regulated Fragmented payment market market structure processing Experienced Opportunity to Global service management deploy capital at model opportunity team enhanced returns 7
Our Current Business Fully-Owned Part-Owned Sub-servicing MSRs MSRs Servicing performed on a CPU has sold part of the What we mean CPU owns the MSR outright contractual basis for another MSR to a third party investor MSR owner Balance sheet $67M value on BS impact $31M value on BS No balance sheet impact $86M advance equity on BS (31 Dec 15) Excess strip deals $4BN UPB Minimal $ UPB Performing $10BN UPB 21K Loans / Loans 38K Loans SPV deals* $9BN UPB $11BN UPB Non-performing $10BN UPB 96K Loans 99K Loans 40K Loans *covered further on Slide 10 8
Revenue Drivers Fully-Owned MSRs Part-Owned MSRs Sub-servicing Typically 20-30 bps Typically 10-15 bps Negotiated fee per loan Performing of UPB of UPB subject to contract Typically a negotiated fee Ranges between 25-50 bps Negotiated price per loan Non-performing per loan plus equity income of UPB subject to contract from SPV Ranges between 2.5-5 bps Subject to negotiation with Other of UPB depending on loan Subject to contract capital partner type Other income includes fees for title services, valuations, sale of foreclosed properties (REO) and debt collection services as well as any incentive payments for portfolio improvement and late fees. Heavily skewed to non-performing loans. 9
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