This is hardly the best time to jump into the business of mortgage servicing. Federal regulators are looking to slash servicing compensation for not only GSE loans but even Federal Housing Administration product. And then there's the robo-signing scandal, with the states hoping to extract a $20 billion pound of flesh from the top firms.
But then there's the case of Walter Investment Management Corp., which last week announced it was buying the specialty servicer Green Tree Servicing for $1 billion. If you're confused, don't be. Green Tree is a specialty servicer; its forte is handling troubled "high-touch" loans for companies that don't want to be bothered with them. It might be argued, however, that the specialty servicer field is too crowded as it is.
But industry advisers familiar with Green Tree's operation say Walter believes Freddie Mac will do more business with Green Tree and hopes that Fannie Mae will use its services. The name of the game here is mortgage servicing rights and delinquent loans.
The government-sponsored enterprises, miffed at the way their seller/servicers handle problem loans, have moved expeditiously the past two years to force-place MSR contracts to such outsourcing firms as IBM Lender Business Process Services, Nationstar and Ocwen.
Green Tree, of St. Paul, Minn., has a contract with Freddie, but not with Fannie. However, that could change over the course of the year as regulators and state attorneys general continue to apply pressure to the nation's megaservicers, which appear to be ill-equipped to handle problem servicing.
"Walter is buying a 'future' on Green Tree," said a servicing executive who deals with high-touch product. "Walter thinks they can grow this business even more — that's what this purchase is all about."
It should be pointed out that Walter, a publicly traded real estate investment trust based in Tampa, Fla., isn't putting up all cash for Green Tree, which is owned by the hedge fund Centerbridge Partners LP. The REIT will issue 1.8 million shares of common stock to the seller, assume $20 million of existing Green Tree debt and issue $765 million of new debt.
In other words, Walter is levering up to buy Green Tree in the hope that it will benefit as the GSEs (and perhaps other mortgage giants) use the servicing business to modify loans, bring deadbeat borrowers current or foreclose.
Green Tree has an interesting pedigree. In early 1998 an insurance company called Conseco bought the mortgage company, which then was not only a servicer but one of the largest funders of mobile home loans, for $6 billion.
To make a long story short, Green Tree moved into subprime, ramped up and eventually Conseco filed for bankruptcy protection. (Sound familiar?)
The servicing division eventually was bought by two hedge funds: Fortress Investment Group and Cerberus Capital, which in 2007 flipped the firm to Centerbridge. Enter Walter and its borrowed money.
Green Tree's MSR/subservicing portfolio is estimated to be in the $30 billion range. Is $1 billion for $30 billion in servicing/subservicing contracts a good deal? Time will tell — and the answer may be provided by the GSEs.
