When Bank of America Corp. said it would unload the servicing of its most troubled Countrywide mortgages as part of a proposed settlement with bondholders, the surprise wasn't that they doubted the bank could do the job.
It was that they had succeeded in getting the company to let other firms try — an experiment some industry officials have advocated for months.
Though regulators have decried widespread servicing failures by the nation's largest banks for more than a year, they have shied away from proposing replacements in enforcement agreements with major banks.
Others have argued that paying smaller servicers more will produce higher quality work and produce a net win for investors in mortgage-backed securities. The B of A settlement will finally test that thesis, industry participants and observers say.
However, applying it to the roughly 275,000 seriously delinquent Countrywide loans will require some retooling.
"I don't think there are 8-10 independent companies that could take that volume right now," said Tony Ettinger, an advisor to TowerBrook Capital Partners and a proponent of giving servicers a greater financial stake in the performance of troubled loans.
"Certainly B of A was not adept at handling delinquents. But I don't think that just anyone will do a better job if the incentives aren't right."
Specialty servicers have been waiting at least two years for some of the big banks to offload pieces of their servicing portfolio. Freddie Mac is expected to sell the servicing rights from Taylor Bean & Whitaker Mortgage Corp. that it received as part of a bankruptcy settlement.
Bank of America must propose a list of subservicers within a few weeks, and industry participants said the roster was nearly finalized. Among the entities likely seeking the business, a source said, are Nationstar, Saxon Mortgage Servicing, Residential Mortgage Solutions and Vantium Capital.
The first three companies did not respond to calls or emails seeking comment, but Vantium Chief Executive Amy Brandt confirmed that her company will receive a portion of the Bank of America loans.
"We and many of the other special servicers have had a lot of extra capacity," she said. "We've invested quite a bit of money in systems organized for the way special servicing should be done, and we're excited to take on the additional volume."
Some subservicers would likely not be interested in the work given its temporary nature and its impact on resources, said Dave Stephens of UCM Inc., which assists small and midsize servicers with hedging transactions.
"It's a burden on their operation," he said of portfolios of purely troubled loans. And not all of the subservicers that pursue Bank of America work are guaranteed to be significantly more adept than B of A.
"It's just that nobody knows them, so [investors] assume they have to be better," Stephens said.
The proposed settlement would almost certainly require the specialty servicers selected for the program to add staff members, Laurie Goodman of Amherst Securities said. But given that the settlement would require Bank of America to roll out only one new subservicer per quarter, there should be time for the companies selected to adjust. And though Goodman argued the structure of the servicing agreement has flaws — she would have liked to see more mandatory disclosures of data — she cited increased spending on servicer incentives and loan modifications as strong positives.
Under the terms of the investor settlement, BofA has agreed not only to pay for the cost of transferring the servicing — around $400 million, according to the company — but to increase payments for things like making contact with borrowers and modifications. Foreclosures, when they happen, will likely be faster, she said, but the subservicers would have a real incentive to see loss-saving efforts through.
"I'd much rather give borrowers a 25% writedown on their principal than take a 70% writedown on foreclosure," she said. Amherst Securities estimates that the additional cost of stepped-up subservicing could run as high as $2 billion, Goodman said, money which Bank of America appears to have provisioned for at the same time that it announced the settlement deal.
In an email to American Banker, Bank of America spokesman Richard Simon declined to speculate on how subservicers might do their work differently. But the company has used subservicers to good effect in the past, he said.
"The goal is to reinstate as many borrowers in a modification that performs well," Simon said. "It also is likely to lead to faster resolution in those unfortunate situations where foreclosure is inevitable."