How North Texas Became a Magnet for Mortgage Servicers

BY BONNIE SINNOCK

FEB 17, 2015 4:52pm ET  

The North Texas region has been a hub for mortgage servicing for decades, dating back to the oil bust and savings and loan crisis of the 1980s.

In addition to loan servicers, North Texas "has investors, the GSEs and it also has a lot of the service providers," said Brandon Kirkham, a senior vice president at VRM Mortgage Services.

As the servicing industry continues its response to the most recent market downturn, some key players and many smaller ones remain firmly entrenched in the area. Much of the Dallas-Fort Worth region's allure rests on the relative business strength of the market compared to other servicing hubs. And while downsizing has occurred in some quarters, others have found the market ripe for recruiting due to its breadth of mortgage expertise.

Still, costs have been a growing concern for servicers as they become more regulated and distressed inventory has dwindled.

"I think servicing companies are always looking for the next best place," said Marina Walsh, the Washington, D.C.-based Mortgage Bankers Association's vice president of industry analysis.

However, it wouldn't be easy for the North Texas servicing industry to pull up stakes because some of the biggest players in the business have long had established and sizable operations in the state.

"It has pretty substantial roots here," said Tiffany Fletcher, senior vice president of compliance at VRM Mortgage Services, an REO asset management outsourcing firm headquartered in the Dallas suburb of Carrollton. Fletcher previously worked in Fannie Mae's local REO sales unit for almost 15 years.

Both agencies have servicing and REO operations in the Dallas area. Fannie Mae, the larger of the two GSEs, has an overall headcount of about 1,800 there, according to spokesman Andrew Wilson. About 65% of those jobs are servicing and REO positions.

Another firm headquartered in the region is Nationstar Mortgage Holdings, which as of the third quarter of 2014 was the fourth-largest servicer overall and the leader nonbank servicer in terms of dollar volume of business serviced.

Others servicers based in North Texas include Caliber Home Loans, Guardian Mortgage and Colonial Savings. Of the 138 nonbank mortgage servicers registered in Texas, 62 are headquartered in the state, according to Texas Department of Savings and Mortgage Lending records. Of those, 18 are located in the 13-county Dallas-Arlington-Fort Worth metropolitan statistical area, more than any other region in the state.

In 2012, Texas had the nation's second largest real estate lending workforce, with almost 32,000 people employed by mortgage companies, construction lenders and related firms, according to the Texas Economic Development Corp., a business outreach group run by the state's governor's office.

North Texas "not only has the loan servicers, which typically are our clients, but it has investors, the GSEs and it also has a lot of the service providers," said Brandon Kirkham, senior vice president of business expansion at VRM Mortgage Services. Kirkham has worked in the region for two decades.

Approximately 80 of the Texas Mortgage Bankers Association's 250 members have offices in North Texas, a group that includes both mortgage originators and servicers, as well as law firms, title and mortgage insurance providers and other vendors. Members based in North Texas account for about one-third of overall TMBA membership and 44% of the 180 companies headquartered in the state.

North Texas emerged as a hub for servicing back in the 1980s, according to Brad German, a Freddie Mac spokesman. "A lot of REO headquarters are in Dallas and that's because of the Texas oil bust back in the late '80s," he said.

Companies like Freddie and others that had large exposures to those crises set up shop in North Texas to be close to where their REO inventories was located. As time went on, the region turned into "a reasonable central location for dealing with national REO," German said.

Thanks in part to tighter state regulations and economic diversification that came out of the 1980s downturn, Texas remained relatively healthy during the Great Recession and wasn't a particularly large market for REO properties during the most recent downturn.

"There are many attractions of being in Texas," said Walsh. "There is no income tax, relatively speaking, and fewer business regulations. There's a skilled and diverse labor force, an availability of space, and it's central to the East and West coasts."

Even servicers and servicing-related companies not based in Dallas tend to do a fair amount of business there.

Chicago-based Fay Servicing opened an office in North Texas last May, citing opportunities to recruit default servicing talent looking for work as a result of downsizing by other firms.

And Baltimore-based servicing technology provider IndiSoft estimates that roughly 25% of its revenue comes from companies with representation in the Dallas area. CEO Sanjeev Dahiwadkar said efforts by government entities within both the state and North Texas region to promote business development have contributed to the concentration of servicing industry firms there.

"Even at municipal level, they are attracting companies with aggressive marketing," he said.

But relative costs of doing business in one area over another also are a factor when it comes to where servicing hubs develop, he added.

The Dallas area has a relatively low cost of living, and that helps counterbalance the ebbs and flows of servicing as a cyclical business, said Fletcher.

Servicing hubs have shifted over time. It's more notable that California isn't more of a servicing hub than that Texas is one, said Howard Hill, a Connecticut-based industry veteran who worked on Wall Street during securitization's early days and has authored a book on the 2007-2008 downturn's roots.

California has been a big servicing hub, but has changed to some extent over time because of rising costs there, said Dahiwadkar.

Besides the favorable cost of living, business incentives, concentration of mortgage expertise and its central location nationally, North Texas has relatively few natural disaster or weather concerns compared to other servicing hubs, said Kirkham. All of this has helped solidify the region's place in the servicing industry and will make it difficult to dislodge.

"I don't know if one particular thing is the reason that the Dallas area is a mecca of servicing, but we do all recognize that it is," said Fletcher. "For it to change it would probably require some drastic maneuvers or issues within each of the various shops. That's not to say that it could never change, but I do think it would take some time."

Source: National Mortgage News

More on how North Texas Became a Hitching Post for Mortgage Servicers and other players who created the foreclosure crisis: 

Perry Bet Big on Tax Grants to Subprime Lenders

Texas homeowners paid $35 million in subsidizes to lure mortgage companies

By JACK GILLUM updated 10/3/2011 8:53:43 AM ET

WASHINGTON — As Texas governor, Rick Perry spent tens of millions in taxpayer money to lure some of the nation's leading mortgage companies to expand their business in his state, calling it a national model for creating jobs. But the plan backfired.

Just as the largest banks began receiving public cash, they aggressively ramped up risky lending. Within four years, the banks were out of business and homeowners across Texas faced foreclosure. In the end, the state paid $35 million to subsidize it. An Associated Press review of federal mortgage data, court filings and public statements found that Perry downplayed early warnings of an impending mortgage crisis as alarmist. That's even as Perry's own attorney general would later investigate whether Countywide Financial Corp. encouraged homeowners to borrow more than they could afford.

As Perry offered $20 million in grants to Countrywide and $15 million to Washington Mutual Inc. — each blamed for having a major role in one of the country's most serious recessions — he took in tens of thousands of their dollars for his gubernatorial campaign.

Perry, a Republican candidate for the White House, did what any governor would want to do: bring in jobs for his state. He also supported a cap on how much consumers could borrow against their homes, which experts credit for softening the blow of the mortgage crisis in Texas: by the end of 2008, more than 22 states had a greater percentage of foreclosures.

Yet Perry didn't appear to recognize that the industry his administration had subsidized was damaging the national economy.

The AP analysis found that Washington Mutual, Countrywide and their subsidiaries boosted risky lending in Texas within a year after receiving grants from the Texas Enterprise Fund. In 2004, only one out of every 100 Washington Mutual loans in the state was originated to homeowners with less-than-perfect credit. The next year, that figure rose to more than one in four.

Countrywide's lending volume also boomed. In 2004, 14 percent of the company's loans in the state were given to high-risk borrowers, but the following year — when Countrywide received its first $10 million disbursement from the fund — the rate of risky loans jumped to nearly one in three, the AP's analysis found. Texas ranked No. 3 for the number of risky mortgages underwritten by Countrywide, behind only Florida and California.

In October 2007, as credit-rating agencies continued downgrading hundreds of billions in mortgage-backed assets on Wall Street, Perry's spokeswoman described Texas as "one of the hottest housing markets in the nation" and dismissed concerns about the looming economic implosion as "slightly alarmist."

The enterprise fund is known in Texas as a signature issue for Perry, and one that has drawn critical scrutiny by the watchdog group Texans for Public Justice in light of subprime mortgage lending in the mid-2000s. The AP's review uncovered new details of his economic deals as he seeks the GOP presidential nomination, particularly in how the two lenders engaged in subprime lending in Texas.

The AP's analysis examined rates of so-called high-cost mortgages, including subprime loans and those that required less documentation than traditional mortgages. Federal data available under the Home Mortgage Disclosure Act identifies mortgage transactions that show signs of risky lending.

Texas officials said the fund has an 11-point vetting process, and subsidies are approved by Perry and top state leaders with requirements to create certain numbers of jobs. Between Washington Mutual and Countrywide's TEF contracts, officials pledged more than 11,000 new jobs.

Bank of America Corp., which acquired Countrywide in 2007, ended its contract under the fund in early 2010 and returned $8.45 million because it couldn't meet the contract's 7,500 promised jobs. But since JPMorgan Chase acquired WaMu, as Washington Mutual was called, in 2008 and maintained the contract, it didn't have to pay back its predecessor's $15 million grant.

"The state's contract with Countrywide was specific to creating jobs, and ultimately produced more than 3,800 jobs for Texans," Perry spokeswoman Catherine Frazier told the AP.

Countrywide pledged to create thousands of new jobs, but later shed more than that in nationwide layoffs. That came as Countrywide and WaMu gave checks to Perry's re-election campaign, including $2,500 from WaMu's political action committee as late as March 2008. The companies gave more than $15,000 in total contributions, state records show.

Meanwhile, Countrywide faced problems in Texas. Perry's own attorney general reached an agreement with the lender in 2008 that would give millions to customers who lost their homes to foreclosure. The attorney general's office began its investigation that year amid allegations that Countrywide encouraged homeowners to accept loans they could not afford.

But the warning signs came earlier.

In the first half of 2005 — just as the companies were collecting subsidies from Perry's administration — more than two-thirds of all loans by Countrywide and WaMu had low- or no-documentation requirements, according to a report compiled by a federal commission on the financial crisis.

Countrywide CEO Angelo Mozilo told Wall Street analysts that Countrywide intended to dominate the mortgage market and increase its overall market share by 2006 to 30 percent.

Back at its offices, Countrywide subsidiary Countrywide Home Loans Inc. processed more than 150,000 mortgages a month in mid-2004, relying on automated underwriting software to speed up the approval process.

That was a year before the mortgage crisis began to escalate, and six months before Perry announced his Countrywide deal. In a speech at the time, Perry called Countrywide a good employer and said state government subsidies would help other such companies move their businesses to Texas.