The rules for originating a mortgage have changed in the seven years since the housing crisis, which in turn have changed loan servicing and even caused a transition of servicing from banks to non-depository institutions.
The material shift of concentration of top-ten residential mortgage loan servicers from banks to non-banks can be attributed to three factors: Regulatory changes, reputational risk, and basic economics, according to CoreLogic SVP of Government Affairs Faith Schwartz in CoreLogic's April 2015 MarketPulse.
Where regulatory changes are concerned, the BASEL III implementation and the Consumer Financial Protection Bureau guidelines have had the most impact on the shift of mortgage servicing from banks to non-banks. BASEL III placed capital constraints on many of the larger financial institutions in the U.S. with sizable MSR portfolios, and the changes in capital standards have led these institutions to rethink their approach to their MSR holdings, according to Schwartz. Also, the CFPB has imposed more stringent guidelines for servicing, borrower engagement, and document management, which has resulted in institutions paying out more than $100 billion in settlements since the crisis.
Reputational risk "remains high with regard to any and all foreclosures," Schwartz said. The crisis gave regulators the ammunition they needed to create loan servicing-specific legislation and policies, which resulted in the straining of the execution of collection and default services for many servicers, whereas those practices had worked well for them prior to the crisis. There were also a number of challenges magnifying problems that magnified industry problems, such as light contact with the borrower, collection of information from the borrower, and the challenge of creating uniform processes, according to Schwartz.
On economics, Schwartz said in post-crisis, the Dodd-Frank Act and subsequent creation of the CFPB led to many consumer protection laws that were enacted to slow down the foreclosure process as the servicing world shifted from that of traditional loss mitigation role to that of a borrower solution provider. Also, the average cost of loan servicing has skyrocketed; the Mortgage Bankers Association and Urban Institute estimate that the cost of servicing performing loans jumped from $59 in 2008 to $159 in 2013, while the average cost of servicing non-performing loans spiked from $482 to $2,357 during that same period.
While the shift in servicing from banks to non-depository institutions makes little, if any, difference to consumers, it has the potential to effect investors, according to Schwartz.
"For investors, the shift in counter-parties to non-depositories can add additional risk as they are institutions with less capital than banks," Schwartz said. "But that can and is being managed, as agencies such as the Federal Housing Finance Agency and Ginnie Mae continue to issue guidance and rules around minimum capital requirements and adapt to these changing players in loan servicing."
While there are many metrics in place to monitor the performance of mortgage loan servicers, according to Schwartz, including: rating agencies, the CFPB complaint database, Treasury HAMP ratings, and Fannie Mae's STAR rating system, to name a few, Schwartz warned that "an area of caution regarding the role of servicing is that the cost of default servicing, as evidenced by recent studies, will materially impact the cost of access to mortgage credit."