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Slide1
Company XYZ – Loan-Level Portfolio
Management PresentationMarch 12, 2015
This document and any attachments to it contain confidential business information intended solely for the recipients. Recipients are not authorized to forward or distribute it to any other party.Slide2
Agenda
Executive Summary
Current State
Background, Engagement Summary, Project Objectives, Project Approach, Industry Comparison, Summary Impact Assessment
Future StateFuture Vision, Future State Options, Loan-Pool-Securities Aggregation ProcessConclusionRecommended Next StepsII. Appendix Supporting Documentation
2Slide3
Current State
: Background
Company XYZ has embarked on a multi-year effort to transform their Mortgage Backed Securities (MBS) program and associated business process and technology to meet the demands of an increasingly complex environment.
Company XYZ’s
overriding goal is to protect and preserve the utility, relevance, and successful track record of the MBS program. The white paper, ABC, illustrates the major issues impacting the program (e.g); this paper also lays out areas in which Company XYZ will be aggressive about changing its program and infrastructure to meet the evolving needs of the market. 3Slide4
Current State
: Engagement Summary
The Unissant/Actualize team was contracted to provide a current state analysis of the
Company XYZ pool-centric
model and what it would take to move towards a model that is based on loan level data.Assumptions: Company XYZ senior leadership has a firm understanding of the policies, procedures, and limitations of the current operating model and does not want a report that re-hashes existing documentation.Company XYZ senior leadership expects a foundational document that identifies key findings, major areas of impact, and plausible options to continue and enhance the success of the MBS program. 4Slide5
Current State: Project Objectives
5
Understand
the complexity of the changes involved of going from a pool structure to a loan-level structure business model including the identification of
policy, business process, and systems gaps. Develop current state documentation to support the creation of roadmap that will ultimately include a current state, future state, gap analysis, identification of key data points, program changes and system changes that will be required to move down the path that allows for loan level processing rather than pool level for certain functions including transferring Mortgage Servicing Rights (MSRs). Establish the foundation for a future state roadmap. Slide6
Current State: Project Approach
6Slide7
Stakeholder meetings7
Date
Stakeholders
Subject
1/14Names of stakeholdersModernization1/22Loan-level future state1/28Loan-level future state1/28Data1/29Reporting & Reconciliation1/29Current state processing2/4Reporting & Reconciliation2/12Working session2/18
Feedback session
3/9
Management Presentation Review
Note: Weekly Status Report meetings were held with working group membersSlide8
Current State: Company XYZ vs Industry Comparison
8The table below illustrates the key differences between
Company XYZ and
the Mortgage Industry both in terms of role name and responsibilities.
ResponsibilitiesMortgage Industry RoleCompany XYZ RoleKey DifferencePre-Issuance/Issuance FunctionsSeller and IssuerIssuer(Servicer)In the Mortgage Industry, once Security or Bonds have been issued, the Seller or Issuer may not have any servicing rights to loans it issued. (excludes PIIT program)Advancing Delinquent PaymentsServicer or SubservicerIssuer(Servicer)The Servicer (barring a Subservicing Agreement giving this authority to the Subservicer) is responsible for advancing funds for delinquent paymentsCollecting Payments
Servicer or Subservicer
Issuer(Servicer)
The
entity servicing the loan (Servicer or Subservicer) is responsible for collecting periodic mortgage payments.
Reporting
Servicer
Issuer(Servicer)
The
Subservicer does send collection reports to support fund sent to the Servicer by the Subservicer. But reporting to the Trustee is the responsibility of the Servicer.
Owner of
MSRs (with ability to transfer)
Servicer
Issuer(Servicer)
The Servicer may elect to sell MSRs in an open market to the highest bidder
while
Company XYZ
requires the entity which issued the Securities to initially hold these rights (excluding PIIT program)
Subservicing Functions
Subservicer
Subservicer
A Mortgage Industry Subservicer
is typically a servicing shop.
Company XYZ
requires Subservicers to be
Company XYZ
Approved Issuers.Slide9
Current State - Loan Level Impact Areas
9What are the impacts from moving from a Pool Level model to a Loan Level model?Slide10
Current State: Summary Impact Assessment
10
No
changes needed
Significant changes neededAs of Q2- 2014Loan-level
Capabilities
Policy
Process
Systems
Data
People
Program guide
Transfer of MSRs
Monthly Reporting and Reconciliations
Compliance
Limited changes needed
The
Unissant/Actualize team
evaluated
Company XYZ
’s key current loan-level capabilities
across
policy, process, systems, data, and people. The
summary of the assessment is provided below:
Current
State Key Findings
Risks/Impact
Roles and responsibilities in the MBS guide do not conform to current industry practices.
Inflexibility of the MBS program will continue; participants may pursue more ‘industry standard’
options
Company XYZ
current policy of only one Issuer per pool is limiting.
Prohibits MSR transfers within a pool at the loan-level; barrier for
program
entry for many participants including non-bank entities
Company XYZ
’s reporting system
can not receive multiple files from multiple issuers within a pool without failing
Prohibits multiple Servicers per pool.
A basic reconciliation occurs from loans to pool to security for one Issuer.
The current reconciliation functionality will not accommodate multiple Issuers/Servicers.
Company XYZ
’s operational performance
measures on Issuers/Servicers are inadequate and do not provide meaningful feedback
Without
measuring “how the participants are performing servicing functions”
Company XYZ
will lack the necessary information for accurate forecasting and decision making.
Detailed impact analysis can be viewed in the
Appendix sectionSlide11
Future State11
Align the Loan-level initiative with
Company
XYZ’s
vision for a future state as illustrated in the white paper, ABC.Discuss proposed new roles and responsibilities, and options for a future state.Identify automated technology solutions for high-intensive analytical functions such as loan-level balance roll ups, pool to security roll ups, and payment tracking from Originators to Servicers to the Transfer agent.The following slides focus on achieving the target state capabilities of a Loan-level model.*****Insert logo of Company XYZ here*****Slide12
Future State: Company XYZ’s Future Vision
12
The
Unissant/Actualize
Team proposed a target state to align with Company XYZ’s future vision for its program. Target State CapabilitiesBenefitsIdentify, understand, and plan for changes to the market environment and market participants.Residential MBS remains an economically viable activityMSRs remain an attractive asset class.Embrace the increasing presences of non-depository firms and the accompanying trend toward networked (specialized) firms.Value in diversity and innovation from these specialized firmsOpportunity to broaden access to the MBS program through non-traditional structuresEstablish
new measures and standards to assess operational and financial performance.
Greater
accuracy for portfolio valuations
Greater understanding of the participants operational performance.
Increase market liquidity both for the program and the program’s participants
Opportunity to transfer MSRs at the loan-level and also divorce
MSRs from servicing operations.
Recognition of entities that finance mortgage servicing operations.
Preserve
Company XYZ
’s long-term program by strengthening
oversight on Issuers for non-compliance
More active monitoring of Servicer activity and MSR values may allow for proactive remediation activities prior to economic event.Slide13
Future State
: Current State and Future State (proposed)
13
Issuer/Servicer
(75 loans)Issuance:Post Issuance:Issuer/Servicer(75 MSRs)Current StateFuture State
Issuer
(75 loans)
Servicer 1
(10 MSRs)
Servicer 2
(35 MSRs)
Servicer 3
(30 MSRs)
Each Issuer/Servicer can have multiple subservicers
The Issuer/Servicer can have only 1 subservicer
Pool 1075
Pool 1075
Post issuance, role changes from Issuer to Servicer
New role introduced
Authorized Servicer
(One Servicer or
Company XYZ)Slide14
Future State: Roles and Responsibilities
14
Issuer
(75 loans)
Servicer(10 MSRs)Servicer 2(35 MSRs)Servicer 3(30 MSRs)
Each Issuer/Servicer can have multiple subservicers
Pool 1075
* Post issuance, role changes
from Issuer to Servicer
Future State Roles and Responsibilities
Issuer
Performs all current MBS Guide functions through Issuance
Authorized Servicer
Issuer or
Company XYZ
assumes this role at Issuance
RESPONSIBLE
for authorizing drafts from central P&I custodial account (for all amounts due to security holders and the guaranty fee due to
Company XYZ)
Sign all accounting reports and certifications to
Company XYZ
and Remittance Advices to Security Holders; also maintain registry for Security Holders.
Servicer
RESPONSIBLE
to advance payments not made by borrowers and covers shortfalls in their P&I accounts when drafted by the transfer agent for loans it holds MSRs to.
Responsible for being reimbursed for advances made prior to MSR sale
.
PAYMENTS
to security holders are drafted from Servicers P&I account by transfer agent
ATTESTS
to the UPB to all loans it holds MSRs for.
Provides oversight with any Subservicer(s) it enters into a Subservicing Agreement with.
REPORT
into investor reporting system.
Subservicer
REPORT
investor reporting system.
Perform all functions required in Subservicing Agreement entered into.
RESPONSIBLE
for sending funds
to Servicer
for drafting by the transfer agentProvide collection reports to Servicer so Servicer can validate cash received.Issuance:Post Issuance:Authorized Servicer(One Servicer or Company XYZ)Slide15
Future State: Option 1 – Servicer as Authorized Servicer
15
Issuance:
Post Issuance:
Issuer/Servicer 1(75 loans)Authorized Servicer (10 MSRs)Servicer 2(35 MSRs)Servicer 3(30 MSRs)
Each Issuer/Servicer can have multiple subservicers
Pool 1075
The Authorized Servicer role is performed either by:
Issuer at Issuance who assumes the role of Servicer
A Servicer who purchases MSRs
Another
Company XYZ
approved Servicer (only if the first two options are not feasible)
The
Servicers and Subservicers will report into
the investor reporting system
separately for the loans they service in the pool. Each Servicer will be responsible for advancing funds and/or covering shortfalls on the loans they hold MSRs to
.
Funds
can be remitted to one central P&I account administered by the Authorized Servicer to be drafted by the
transfer agent.
Another option is to have the
transfer agent
draft out of each Servicer’s P&I account (Custodial or Central
).
Placing responsibilities
of the Authorized Servicer on one of the Servicers may not be economically viable to that
Servicer if there is no compensation. This function may require additional resources to ensure adequate coverage of the Authorized Servicer responsibilities. Slide16
Future State: Option 2 – Company XYZ as
Authorized Servicer16
Issuance:
Post Issuance:
Issuer/Servicer 1(75 loans)Servicer 1(10 MSRs)Servicer 2(35 MSRs)Servicer 3(30 MSRs)
Each Issuer/Servicer can have multiple subservicers
Pool 1075
The Authorized Servicer role is performed by:
Company XYZ or
a Vendor it contracts with to perform this function
.
The
Servicers and Subservicers will report into
the investor reporting separately
for the loans they service in the pool. Each Servicer will be responsible for advancing funds and/or covering shortfalls on the loans they hold MSRs to
.
The transfer agent will draft
out
of each Servicer’s
P&I account (Custodial or Central
).
Company XYZ
will have final authorization of each draft out of each Servicer’s P&I account.
Company XYZ
Company XYZ
will need to ensure there are sufficient resources available for adequate coverage of the Authorized Servicer responsibilities. Slide17
Future State: Interim-Only Solution
17
Issuer
(75 loans)
Servicer(75 MSRs)Subservicer 1(35 loans)Subservicer 2(30 loans)Pool 1075IssuancePost-Issuance
Subservicer 3
(10 loans)
Post-Issuance, the Issuer will now have the role of Servicer. The Servicer can only sell MSRs at the pool level per
Company XYZ MBS
Guidelines.
The Servicer may enter into as many Subservicing Agreements as it would like within a pool. Each Subservicer would continue to be an approved
Company XYZ
Issuer.
The Subservicers will report on their loans into the investor reporting system and will be required to send the Servicer a reconciliation of payments so the Servicer is aware of what payments are required to be advanced.
While each Subservicer can have its own Custodial P&I account, they will required to send payments to the Servicer and the Servicer will make available funds for the transfer agent to draft to pay the Security Holders.
This is an interim solution only and would not allow the Servicer to sell their MSRs at the loan-level.Slide18
Future State: Automated Reconciliation Function
18
Servicer 1
(10 MSRs)
Servicer 2(35 MSRs)Servicer 3(30 MSRs)Pool 1075“An Adaptive System”
Investor Reporting System
New technology to be developed
Transfer Agent
Reports
Reconciled payments
Reconciled balances
Performs calculations
Loan-level roll up to pool
Pool roll up to security
Performs calculations
Reconciles cash from Servicers
Company XYZ
should create a new technology system that allows
Company XYZ,
the Servicers, and the transfer agent to integrate reconciliations in a real-time processing environment.
Calculation ExampleSlide19
Conclusion
Executive Summary
Scope
: Company XYZ
I pools are more problematic moving to a loan-level model. To lessen impacts, it should be considered to move only Company XYZ II pools to loan-level. Company XYZ I holders can convert to Company XYZ II to achieve new featuresPolicies: Policy changes will impact roles and responsibilities (i.e., Issuer, Servicer and Company XYZ), processes and procedures. We recommend a role of Servicer be established.Processes: Internal and external business processes will be impacted with policy changes. It is expected that the Compliance and Monitoring, Eligibility, Investor Reporting and MSR process will have medium to high impacts while the Document Custodian Processes are minimally impacted. Data: Loan-level data is currently collected at issuance and via monthly servicing files. The capture of additional loan level data would be minimal.Systems: Low impact to issuance modules and high impact to post-issuance systems.____ systems will potentially have significant business
rules and
reporting impacts.
An
automated function
that
reconciles loan-level to pool balances prior to funds being sent to the
Pool Processing Agent needs to be created.
People:
Company XYZ
has limited resources to facilitate the large change. Reliance on vendors
will
be
required in the short term; long-term Company XYZ should invest funds spent on consultants into creating the new automated reconciliation function. Also shift more analytical functions related to operations from vendor resources
Company XYZ
employees.
Approach Recommendation:
Determine the role and responsibility Company XYZ wishes to perform in the future state model.
19Slide20
Recommended Next Steps20
Conduct deeper dives on roles and responsibilities, xyz system enhancements, which includes additional reconciliation calculations, and risk and control processes.
Identify potential recommendations for current modernization projects that can further Loan Level objectives.
Begin preliminary roadmap that includes high level scope and cost estimates.
Executive SummarySlide21
Appendix
21
Supporting Documentation
Loan Level to Modernization
InitiativesCurrent State Reporting and ReconciliationFuture State Reporting and ReconciliationFuture State Reconciliation exampleFuture State Roles and ResponsibilitiesCompany XYZ Current State System DiagramCompany XYZ Future State System DiagramData Hierarchy View (Current and Future State)Policy Impacts Process & Data Impacts System ImpactsPeople ImpactsSlide22
Loan Level to Modernization Initiatives22
A meeting is scheduled on March 27 to conduct walkthrough of Company XYZ’s vision and associated initiatives Slide23
Future State Reconciliation example
23
The attached Excel document simulates a
F
uture State Security scenario. The scenario shows pools with multiple Servicers/Subservicers. The tabs are set up as follows.Tab 1 – Show pool at a time where there have been loan-level MSRs sales with multiple Subservicers. Each pool has an explanation of what happened within that pool.Tab 2 – Illustrates what would be reported to the investor reporting system by each Servicer and Subservicer.Tab 3 – Shows what loans each Servicer is responsible for with regards to advancing/covering shortfalls.Tab 4 – Illustrates a sample report the Subservicers would sent to the Servicers so the Servicer is aware of all subserviced loans they have to advance.Slide24
Future-State Roles and Responsibilities
24Slide25
Current and Future State – Data Diagram
Pool Tables (includes Issuer info)
Pool – Loan Cross Reference Table
Loan Tables
Pool TablesPool-Servicer Tables
Pool – Loan Cross Reference Table
Loan Tables
Connected by Pool Unique ID
Connected by Loan Unique ID
Connected by Loan Unique ID
Connected by Pool Unique ID
Connected by Pool and Servicer ID
Issuer – Pool - Servicer Cross Reference Table
Pool-Issuer Tables
Connected by Pool and Issuer ID
Data Management
The current state data structure is based on the assumption of one pool which contains many loans and each pool has only one Issuer associated. In the future state the assumption is that each pool will contain one or many loans and each pool can contain one or many Servicers. The diagram below illustrates these concepts.
Current State
Future StateSlide26
Policy Impacts
26
Current State
Future State
PolicyA 'Servicer' entity does not exist in the MBS guide.Roles and responsibilities
Investor Tax Reporting
Payment to security holders
Pool (loan) transfers
Standard
policy for
Issuer and Servicer application and eligibility
Report all pool level information including RPB and also submits loan level information
Comments
Transferring MSRs is industry wide performed between Servicers, not Issuers.
Current Post-Issuance roles and responsibilities of an Issuer resembles those of a Servicer.
Policy specifies Issuer
Transfer agent will continue to make payments to Security Holders.
MSR transfers do not exist within pools – a policy needs to be created.
Create policy for Servicer application and eligibility. Compliance changes
This will be one of the biggest changes to policy as the policy will need to rewritten to address aggregation methodology.
DK
Don’t Know
Significant changes needed
Limited changes needed
No
changes neededSlide27
Process & Data Impacts
27
Current State
Future State
ProcessServicer EligibilityServicing reports and reconciliation
Issuer/Servicer Compliance reviews (6 months)
Servicer
Scorecard
Data
Transfer of MSRs
Document Custodian
Investor Tax Reporting
Data Architecture
Changes
Required
Additional Loan Level Data Needed
Data Structure
Changes Required
Data Calculations/
Rules Needed
Doesn’t exist
Comments
New process for Servicer eligibility
New functionality and new process needed
Currently performing at loan-level
Leverage existing Company XYZ II process
Can get by with little or no new data
Depends if calculations are stored in databases or calculated from data
ETL and data flows
DK
Don’t Know
Change all databases
Splitting MSRs will create many new processes
New operational process for Servicers
Develop a scorecard for for Servicers
Significant changes needed
Limited changes needed
No
changes neededSlide28
System Impacts
28
DK
Don’t Know
Current StateFuture StateSystem nameAssemble and Submit Pool
Report
UPB
System name
Perform Transfer of
MSRs
Apply for Approval as
Company XYZ
Issuer
Apply for Commitment Authority
Assemble and Submit Pool and Loan Issuance Package
System name
Primary Data Repository for
system name goes here
System name
Perform Pool, Loan Package and Loan Accounting
Reporting
Aggregate UPB Balances and perform reconciliation
Collect Tax Report Information
Perform Agency Matching
Provide
access to Disclosure of MBS Pools
System name goes here
System name goes here
Comments
Reconciliation enhancements needed
xyz to continue performing this function
Additional reporting fields needed
Significant changes needed
Limited changes needed
No
changes neededSlide29
People Impacts
29
Option #1
Future State
PeopleResource required to perform data aggregation and reconciliation functionsAdditional training (external)
Additional training (internal)
Review of
existing
vendor contracts
DK
Comments
Traning for Issuers/Servicers/
Custodians
Training for Company XYZ and vendors
Policy change of splitting out MSRs and providing more authority to Servicers will impact vendor SLA’s.
Deeper analysis required depending on option selected
DK
Don’t Know
Significant changes needed
Limited changes needed
No
changes needed