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CoreLogic and Urban Institute Seminar Explores Mortgage Servicing Issues

Current State and Future Trends

Faith Schwartz    |    Mortgage Performance

CoreLogic and the Urban Institute recently co-hosted a discussion that delved into the current issues facing loan servicing and how those issues impact multiple aspects of the residential housing finance ecosystem.

Why are we still talking about residential mortgage loan servicing

Ten years ago, it would be hard to imagine many people knowing the name of their mortgage loan servicer, while most would certainly recognize who originated their first loan.  As part of our post housing crisis recovery, residential mortgage loan servicing remains central to the discussion and a pain point for many institutions that have paid out record fines due to related violations. The plumbing for private label securitization is not in place for investors to come back as well as the roadmap for how we best make sure that the past is not repeated. 

Mortgage loan servicing costs are central to the pricing of mortgage credit.

Mortgage servicing rights, MSRs, have a cash flow and performance expectation based on repayment that drives investor interest and liquidity.  A portion of our discussion focused on the extraordinary rise in cost to service mortgage loans, issues confronting the consumer and reverberations across the broader mortgage market.  The Mortgage Bankers Association (MBA) and the Urban Institute issued a paper that reflects a rise in cost of default servicing that is four times higher than it was in a more normalized market environment.  Those costs will inevitably be embedded in the cost of obtaining credit which may disproportionately impact low and moderate income borrowers.

Throughout the crisis of 2008, default loan servicing processes were stretched and broke down with unprecedented demand from consumers who were behind on their mortgage payments

Call centers were overwhelmed, legacy systems were not nimble enough to handle the volumes and variations of requests and a patchwork of state laws added to the complexity of compliance.  The investor community demanded very different processes with regard to loan restructuring.   And public opinions quickly soured against lending institutions.  In many areas, the investor rules around restructuring  mortgage debt did not keep up with the intent or ability of industry and non-profits to help consumers.

Dial forward to 2015.

The legislative fix through the Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), who in turn amended the existing “Servicing Rules” (Regulation X, which implements the Real Estate Settlement Procedures Act and Regulation Z, which implements the Truth in Lending Act) that then became effective in 2014.These guidelines followed the prudential regulators, Office of the Comptroller of the Currency and Federal Reserve, consent orders around mortgage loan servicing in addition to a 49 state Attorney’s General settlement with the top five largest mortgage servicers.  Institutions continue to build processes and systems to deal with historic resetting of rules around how a borrower is handled at origination and servicing, to how a loan is handled in default through foreclosure.  Layer on 50 state laws, varying local and municipal laws and additional investor oversight from HUD and the GSE’s and you have a seriously complicated and costly schematic for institutions that remain vested in this business.

Looking ahead to a new mortgage loan servicing compensation model:

For the vast majority of loans, performing loan servicing will be managed in a low touch, high volume, low cost structure.  A housing market that has gently rising home values and less price volatility will help maintain a more consistent environment of performing loans.  The defaulted loan servicing process remains more complicated as it attempts to balance investor buybacks/recourse risk, a variation of state and federal laws, reputation risk and increased oversight by the regulatory community.  Blending the anticipated cost of servicing together makes it a complex calculation and a fee for service model continues to make some sense with regard to pricing MSRs as an asset.  As the industry comes together with the regulatory, investor and consumer-interest communities, it makes sense to revisit the residential servicing loan compensation model.

The mortgage market has changed dramatically.  New rules exist for origination and servicing that impact how business can be conducted currently and in the future.  While loan products are much improved due to ’Qualified Mortgage’  and ‘Ability to Repay’ rule requirements and consumers enjoy significant protections from a newly created agency, the CFPB, the defaults and delinquencies will forever be an unfortunate occurrence for all involved parties. This therefore requires that we reexamine our current system and develop a new model that ensures the industry has learned from the past but does not place undue risk on our future.

The links below provide more information from our panel and a recent white paper regarding mortgage loan servicing.

PowerPoint Presentation from the Co-hosted Event

CoreLogic White Paper on Mortgage Servicing

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