Sunday, October 25, 2015

Gloat a little. Stowe's RCS is a Money-loser for the Greedy Fools Who Bought it

Such excitement in late 2013 when American Capital Mortgage Investment (trading as MTGE, leaders depicted above) brought little Residential Credit Solutions of Fort Worth, Texas into the fold.

RCS has an experienced management team with a fully-developed infrastructure and has obtained approvals from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae) to hold and manage mortgage servicing rights (MSRs)

...they crowed. They should have figured out that the cowboy running RCS, Dennis G. Stowe, has friends in high places and that his "business" was a sham, destined to collapse like Saxon Mortgage did.

For a minute or two, investors were drooling over American Capital's (MTGE) dividends.
Such wow! So much money to be made, just sitting in a chair!

But now it looks like bedsores for the chair-sitters, and I don't use the term lightly. Bedsores are a terrible problem and we don't do enough to prevent and treat them in the most vulnerable among us, the bedridden and especially the bedridden elderly.

Metaphorically, you will have wounds that do not heal if you stake your wealth on a predatory foreclosure mill. Seeking Alpha (10/16/15) is not one to sugar-coat bad news
• MTGE has continual losses on their servicing business.
• The loan servicing business, known as RCS, was already creating losses, a trend they continued in every quarter since.

• The servicing department was acquired, along with 250 employees, yet still failed to have sufficient economies of scale to turn a profit.

• The assets tied to this acquisition are highly illiquid and management went from touting the investment to simply saying they were exploring options to reduce losses.

• I’m trying to determine what value if any should be kept on the balance sheet for a subsidiary that only provides losses.

RCS's income doesn't depend only on the skill of their 250 employees, it depends on the inclinations of 64,000 borrowers, which is influenced by the employees. There's a lot of firing and hiring to be done before that staff becomes competent and able to foster and sustain good relationships with borrowers. Recall that it was RCS's penchant for canceling in-progress loan-mod trials and starting foreclosures that got them in trouble with CFPB. Here's a compilation of one or two sentences from every review of RCS currently available on It will open in a new window, and this one will remain open.

 This is by someone who works for a mortgage company:

RCS's income also depends on being able to keep successfully collecting payments and failing that, foreclosing on loans. Seems like there's a little more outrage every week about the robo-signed notes and note assignments, and a lot of writers predict a new wave of the crisis next year when interest-only loans that were taken out in 2006 hit the ten-year mark with a full balance and 20 year amortization.

Yes, that will be bad, and will continue into 2017 and beyond. An interest-only payment at an unmodified interest rate (over 6%) that's $3300/month would have had an amortizing payment of about $3900 when the loan had 30 years to go. It will have an amortizing payment of $4700 when it converts in 10 years with only 20 years left to pay it off. There will borrowers who have been easily paying their IO loans every month to whom this comes as a large surprise and it will happen across a range of incomes. With the new energy they bring to the fray, it might mean the end of RCS's ability to win every foreclosure lawsuit without being able to name a legitimate beneficiary for the mortgage (mortgagee), and in non-judicial foreclosure states, to proceed without serious resistance from borrowers at the high end who can defend their homes in court.

HAMP, the federal program that offers trivial incentives to servicers to lower interest rates or very rarely, reduce principal, ends on December 31, 2016. If you took out a loan in 2006, check the note to make sure it doesn't come with an unhappy ending.

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Have you had a go-round with RCS? (If you're willing to share any NPV input data you got, please let me know.(