Panelists at MBA’s National Mortgage Servicing Conference & Expo here identified the Top 5 issues as: cost and capacity management; repurchase risk management; operational risk management, such as Sarbanes-Oxley 404 and Basel II; cash flow management; and maximizing customer value.

Cost and Capacity Management
This issue is important because some servicing initiatives focusing on cost improvement and/or customer service could damage cash flow economics, said Martin Touhey, senior manager of the consumer finance group with New York–based PricewaterhouseCoopers.

“You attack profitability from two sides: You attack from either the revenue side or the cost side,” Touhey said. “Excess or over capacity can adversely affect profitability and customer retention. Sub-servicing initiatives that people take, one of the key things is that people focus on is cost. Sometime when you are only focused on cost you can actually kill the revenue side of the business.”

Touhey said a key point for servicers is the ability to understand cost components by breaking it down to fixed versus variable and marginal costs, to make sound strategic decisions. Touhey also suggested avoiding blanket cost reduction such as “slash and burn.”

“If you cut costs in that manner, the chances are that you are going to do more harm to the business. The key here is to understand your cost drivers,” Touhey said. “You can do this by examining what is value added versus non-value added activities and target the high cost/low value activities for re-engineering.”

Repurchase Risk Management
“To get the most bang for your buck in this area you have to target the front-end,” Touhey said. Strong front-end controls, if servicers get it right upfront and avoid the headaches, this has the greatest potential for savings. “Anytime you follow a big refi boom you can pay the piper for shortcuts to get all those loans through the pipeline, it’s definitely something you should be aware of,” he said.

With strong controls in place, Touhey also suggested creating a centralized database to reduce the reliance on Excel and Access databases by creating an interface directly to other systems such as servicing and accounting. A centralized database can also track investor requests and correspondence with brokers and mortgage insurance companies to ensure that requests are processed on time.

Operational Risk Management
“Servicing is a material asset,” said Matthew Cosman, senior associate with the consumer finance group with PricewaterhouseCoopers. Sarbanes-Oxley 404 and Basel II affect many organizations, he said. Key risks involved in understanding the Sarbanes-Oxley and Basel II compliance include financial losses, regulator sanctions, legal exposure, investor sanction, fraud losses and repurchases. This affects several servicing areas such as default, investor reporting, investor accounting, cash management and loss mitigation and collections.

“The risk structures over the past 50-70 years have become so much more dynamic and we have become so much more granular now in measuring risk,” Cosman said.

Cosman said servicers must work with various constituents to accommodate internal 404 and Basel II programs. Work done upfront to identify all significant risks and controls can lead to stronger controls and a better understanding of processes which can translate to redesign to effect more efficient process, he said.

Policies and procedures should be up-to-date to pass regulatory and audit standards. “This is another opportunity to make sure those policies and procedures which you use day-to-day are updated,” Cosman said.

Cash Flow Management
Cosman called this the “performance measurement,” whereas in the past, there was less understanding of cash flow performance at the loan level. “The servicers who will perform the best in the coming years are those who recognize when a cost management initiative will be a detriment to operational cash flows,” Cosman said. “This requires a detailed understanding of costs; a detailed understanding of operational cash flows such as float, corporate advances and fee income; and performance measures that are balanced between cost management and revenue maximization.”

“We need to get to a place where we can actually track cash flow at a loan level,” Cosman said. “Most importantly, a company must have a detailed knowledge of the cash economics of mortgage servicing to perform effective process improvement analysis.”

Customer value
“Customer value is very important to your long-term success as a servicer,” said Tom Stier, vice president of retention marketing for IndyMac Bank, Pasadena, Calif.

Servicing portfolios are more stable presenting greater cross sell opportunities. “The Holy Grail that everyone is actively pursuing is the purchasing needs that our customers have,” Stier said. Many servicers have also implemented streamline refinance products to reduce expensive acquisition costs. Home equity loans are also a key area of focus, he noted.

“A key will be anticipating what your customer’s need will be as they transition from one life cycle to the next,” Stier said. “You can not be satisfied with the crumbs left over from others. An important factor about providing customer value includes up-front data capture to support retention and marketing efforts. You must gather more intelligence about your customers. Mine information from forms and third-party vendors.”
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This is an opportunity to hear directly from the rulemakers what the impact of the new ABS rule is on the real estate community. It is also an opportunity to hear the SEC explain some of the more difficult questions that have arisen after reviewing the rule.

The SEC ABS rule affects all real estate mortgage-backed securities in public transactions. If you are a servicer, the SEC ABS rule will affect your disclosure, reporting and annual accounting practices. If you are a lender, the SEC ABS rule will impact your registration, disclosure and reporting requirements.

On January 7, the SEC issued a final rule to codify requirements for the registration, disclosure and reporting for ABS, by definition including commercial and residential mortgage-backed securities (CMBS and RMBS). The final rule represents an effort by the SEC to codify 20 years of fragmented guidance and to clarify which transaction parties should handle various aspects of ABS securitizations, including clarifying and formalizing transaction participants' responsibilities for disclosing and reporting information regarding security collateral to investors. The rule is significant to MBA members who are involved in the rapidly expanding ABS sector.

The final SEC ABS Rule can be found at: http://www.sec.gov/rules/final/33-8518fr.pdf.

The SEC issued the proposed rule last May. MBA consulted with numerous MBA members representing single family, multifamily and commercial lenders, and submitted comments on the proposed SEC ABS rule on July 12. On September 23, MBA members and staff met with SEC staff to discuss recommendations in MBA’s comment letter. When the final rule was published in the Federal Register on January 7, it reflected many of the recommendations made by MBA.

For a detailed discussion on the MBA’s recommendations and the SEC ABS final rule, please review the MBA Issue Paper.

The SEC staff requested MBA to submit a list of questions to the SEC prior to the conference call. MBA worked with representative members, in both the residential and commercial business, to gather the most pertinent outstanding issues and questions. MBA submitted a list of questions and awaits SEC staff confirmation that they will respond to the questions asked on the call.

The call format provides a forum for MBA members to hear the comments of the SEC. The SEC discuss the rule, but will be unable to make comments on the call. Given the anticipated large participation of MBA members on the call, it will not be possible to open the call to all for questions. Additionally, MBA encourages large offices to meet and call in on one phone line, as only 125 lines are available for the call and both commercial and residential members will participate.

Date and Time:  March 1, 2:00-3:00 p.m. EDT

Call-in Number:  720/239-6092

Conference Code:  5572747

For additional information, contact Alison Utermohlen, MBA’s senior director of government affairs, at 202/557-2864 or autermohlen@mortgagebankers.org, or Katie Schwarting, director in MBA's commercial/multifamily department, at (202) 557-2742 or kschwarting@mortgagebankers.org.
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The letters, sent this week by The Brownfields Cleanup and Re-Investment Coalition, of which MBA is a member, urges support of S. 398, introduced by Sens. Rick Santorum, R-Pa., and Evan Bayh, D-Ind., and H.R. 877, introduced in the House by Reps. Jerry Weller, R-Ill., Nancy Johnson, R-Conn., and Xavier Becerra, D-Calif.

The identical bills would make permanent Internal Revenue Code Section 198, which allowed the expensing of brownfields clean up costs but sunsets at the end of 2005 (The law expired at the end of 2003 but Congress extended it to 2005 last year). It would also broaden the definition of “hazardous substances” in Section 198 so it covers petroleum contamination; and repeal the provision in the law that recaptures the expense deduction as taxable income when the property is sold.

The coalition said the costs of brownfields clean up–upwards of $500,000 to $1 million–can be a significant obstacle to re-development projects. But the coalition noted that the bills would enable such sites to bring additional tax revenues of nearly $2 billion annually and could create up to 550,000 jobs.

“Numerous brownfields are located in prime business locations near critical infrastructure, including transportation, and close to a productive workforce, the coalition letter noted. “Putting these sites back into productive use will generate good paying jobs and affordable housing in areas where they are most needed.”

The U.S. Conference of Mayors and the Government Accounting Office estimate that more than 400,000 brownfields sites exist across the country. “In every state in the country there are brownfields–areas blighted by run down, abandoned or under-utilized properties,” the coalition said. “We all have seen them—the shut down manufacturing facilities, abandoned warehouses and gas stations. On these properties once stood vibrant and productive enterprises, but changing times and events have drained their vitality and they are now in desperate need of revitalization and redevelopment. Before they can be re-developed, however, environmental contamination must be cleaned up. How this cost is treated for tax purposes should not be another obstacle—but it is.” 

Communities need to put abandoned, polluted sites back into productive use, the coalition wrote. “Restoring and revitalizing these properties will drive economic growth, help provide affordable housing and successfully balance the development needs of communities with the goal of a clean, livable environment.”

Coalition members include MBA; the American Institute of Architects; the American Resort Development Association; the Appraisal Institute; Building Owners and Managers Association International; the International Council of Shopping Centers; the National Association of Industrial and Office Properties; the National Association of Real Estate Investment Trusts; the National Association of Realtors; the National Apartment Association; the National Multi Housing Council; The Associated General Contractors of America; and The Real Estate Roundtable.
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Securitization is now a significant part of the real estate debt and equity markets. Conduit lenders are competing aggressively with traditional portfolio lenders for loans, and new rules apply to the negotiation and documentation of real estate commercial loans. Real estate finance, once a local or regional business, is now an integral part of global capital markets. Borrowers now have many choices available for public or private, securitized or non-securitized debt. Although securitization has provided access to new sources of capital, periodic turmoil in the capital markets demonstrates that securitization is not without risk. As a result, borrowers and their counsel must carefully consider the advantages and disadvantages of each financing choice.

This annual advanced course of study, comprising 12 full hours of instruction, is designed for real estate lawyers who need a better understanding of the basic elements of the securitization revolution. It answers many of the questions commonly asked: What is negotiable? What is not? What will it cost my client? What do the rating agencies really require? How do I protect my client against volatility in the capital markets? What happens if the lender or servicer encounters financial difficulty? What if the market changes or my client defaults? Whom do I talk to if there is a problem, a default, or a change in circumstances requiring an amendment to the documents?
 
Coursework includes:
• An overview of the economics of the marketplace, presented by representatives of investment banks and other industry leaders
• How to build a bond
• The basic types of securitization structures (including the creation of special purpose, bankruptcy remote entities), along with their legal and practical consequences
• The role of the rating agencies and their requirements, explained by representatives of the leading agencies
• Securitized vs. portfolio loans: a comparison of the risks and rewards
• A brief, user-friendly discussion of tax issues and concerns in various types of transactions, offered by a tax expert
• An exposition of the mortgage loan and related documents developed for securitized lenders by the real estate industry's Capital Consortium
• Advice for dealing with servicers of loans after securitization
• Key opinion issues: How does borrower's counsel respond to a request for an overreaching opinion or a claim that the required form of opinion cannot be changed?

Tuition for this course is $995. Tuition entitles registrants to admission to all sessions, a set of study materials, continental breakfasts and refreshment breaks daily. To register, call 1-800-CLE-NEWS (800-253-6397) or visit the conference Web site, www.ali-aba.org. The conference will take place at the Omni Hotel in Chicago.

The conference is sponsored with the cooperation of the Capital Consortium, whose members include MBA; the Bond Market Association; the Commercial Mortgage Securities Association; the National Association of Realtors; and the Real Estate Roundtable.
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Sierra Capital originated and funded the acquisition of The Arches Apartments , a 410-unit apartment complex in Sunnyvale, Calif., for $38.5 million. The loan has a seven-year ARM amortized over 30 years. The seven-year ARM includes an embedded cap at 6.15 percent.

The Arches Apartments, located near Highways 101, 237 and Central Expressway, “offers easy access to downtown Sunnyvale/Murphy Street and downtown San Jose,” said Bryan Frazier, principal of Sierra Capital Partners, who originated the loan with Trent Brooks, principal at Sierra Capital.

With six different floor plans, unit amenities for The Arches Apartments include carpet, vinyl flooring, vertical window treatments, range/oven with vented hood, dishwasher, ceiling fan, garbage disposal and dead bolts. Townhouse units have a washer and dryer. Common amenities include pools, a spa, clubhouses with fireplaces, a gazebo and laundry facilities.

Frazier and Brooks also originated acquisition financing for South Hills Apartments , an 85-unit apartment complex in West Covina, Calif. closed at $10.6 million. The capped ARM has a seven-year term amortized over 30 years with a one year prepayment lockout feature. The seven-year ARM included an embedded cap below 6.15 percent. South Hills, located in the San Gabriel Valley area of Los Angeles, was built in 1966 and consists of 19 residential buildings, including a one-story recreation building on 5.11 acres of land.

The property was renovated in 2004 and has one-, two- and three-bedroom models. Unit amenities include carpet, vinyl flooring, vertical window treatments, range/oven with vented hood, dishwashers and garbage disposal. Two and three bedroom units have a fireplace and washer/dryer hookups. Common amenities include pool, saunas and two recreational buildings.

Sierra Capital Partners funded the acquisition of Westchester Apartments , a 65-unit apartment complex in Anaheim, Calif., at $5.5 million. The loan has a fixed to float 10 + 1-year term amortized over 30 years.

The apartment’s location is near Knott’s Berry Farm and Disneyland. Common amenities for the securely gated community include open courtyard greenbelt areas and laundry facilities.
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CampusMBA, the education arm of the Mortgage Bankers Association, offers an Audio Program on Friday, February 25, from 3:00 - 4:30 p.m. EDT to bring you up to speed on HMDA's new requirements. Listeners will learn:

• The background and purpose of HMDA
• Pre-2005 HMDA reporting requirements
• New requirements and how they work, including data elements, coverage requirements and new definitions
• The "nuts and bolts" of reporting, including how and when data is to be reported, checking data internally before reporting and submission formats
• How data is disclosed by lenders, the Federal Financial Institutions Examination Council and the Federal Reserve Board
• What the data may show, what it won’t show, and why
• What the regulators are saying about HMDA
• Other concerns

Listeners will also have the opportunity to ask questions about these and other HMDA matters during the question and answer session.

Panelists include Andrew Sandler, partner with the law firm Skadden, Arps, Slate, Meagher & Flom LLP; Jeffrey Jaffe, national CRA/fair lending director for CitiGroup; Amy Brachio of Ernst and Young; and Ken Markison, MBA’s senior director and regulatory counsel.

The program includes a 60-minute presentation, followed by a 30-minute interactive question and answer session. Just dial in from your conference room speakerphone to train your staff—whether there are two or 20 employees in attendance.

To register, click here or call (800) 348-8653. Registration is $225 per site for MBA members, $325 per site for Nonmembers. If you have any content questions in advance of the audio program, please direct them to Ken Markison at kmarkinson@mortgagebankers.org or call (202) 557-2930.
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Powell will share his view of the international community and the role of the U.S. as a democratic nation and world leader.

As the 65th Secretary of State, Powell represented the U.S. on the world stage and influenced international affairs for the past four years. As he stated at his confirmation hearing, the guiding principle of U.S. foreign policy during his tenure was that "America stands ready to help any country that wishes to join the democratic world."

Powell’s history of service to the U.S. is broad. Before becoming Secretary of State, he served as a key aide to the Secretary of Defense and as National Security Advisor to President Ronald Reagan. He also served for 35 years in the Army, rising to the rank of four-star general and serving as chairman of the Joint Chiefs of Staff (1989–1993). During this time Powell oversaw 28 major events, including the Panama intervention of 1989 and Operation Desert Storm in the 1991 Persian Gulf War.

Powell has won numerous military and civilian awards. He is also the founding chairman of America’s Promise-The Alliance for Youth, a national crusade to improve the lives of our nation’s youth. He is also the author of a best-selling autobiography, My American Journey.

Registration for MBA’s 92nd Annual Convention & Expo 2005 is now open. You can visit the Web site at http://events.mortgagebankers.org/92nd_annual to register and to see the line-up of internationally known speakers at this year’s convention.
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Unfortunately, the Internet is also the root of class action lawsuits involving the mortgage service industry, according to panelists at the Mortgage Bankers Association’s National Mortgage Servicing Conference & Expo here. “We are in an industry under attack from a variety of sources,” said Alan Wolf, attorney with The Wolf Firm in Costa Mesa, Calif. “These class actions arrive and begin on the Internet.”

Consumers are increasingly using the Internet to voice frustrations and complaints on mortgage companies, employing methods such as email, Listservs, bulletin boards, blogs and “wikis,” a form of interactive Web site. In response, “Lawyers are aggressively soliciting plaintiffs for class-action lawsuits,” said Michael Feiwell, an attorney with Feiwell & Hannoy P.C., Indianapolis.

Blogs—personal diaries for public consumption—have become increasingly popular as a rallying point for venting. “It used to be a bad day when ‘60 Minutes’ was waiting for you at your office. Now it’s a bad day when you go to a Web site and find a blog about your company,” Wolf said.

The mortgage industry, panelists said, has been slow to understand the power of the Internet as a customer service function. “Every single company at this conference is part of this discussion. They [consumers] are talking about all of you [on the Internet],” said Wolf. “We are not organized at all in this war.”

Wolf said Web communications are a great resource for companies and their compliance departments to find out what might be broken and what is making customers unhappy. Communication tools such as Listservs provide an opportunity for the industry to discuss important issues, but they are not being used, he said. “These are highly effective tools to disseminate information to consumer groups,” he said.

In dealing with consumer groups, Wolf suggested forming a partnership. “We don’t do a good job of explaining our business to consumer,” he said. “We need to provide our side of the story.”
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