Fed's Raskin says mortgage servicing business model needs reworking
The mortgage servicing business model caused the whole industry to collapse, according to Sarah Raskin, a member of the Federal Reserve Board of Governors. She spoke in Boston Friday at the Consumer Rights Litigation Conference hosted by the National Consumer Law Center.
Raskin told conference attendees that the problem started when the servicing industry switched from being an "originate-to-hold" system to an "originate-to-distribute" system. Before securitization became commonplace, she said, it was much more likely for a mortgage to be serviced by the same entity that originated it. Now, that is not the case.
Raskin described the emergence of third-party servicers to service loans on behalf of the securitization trusts. The trusts were supposed to be passive and leave the management of individual loans to the servicer. This model was insufficient, however, because the two entities never worked out a payment plan structure to deal with bulk loans.
"Unfortunately, as we are seeing now, there are also dramatically significant drawbacks to this model," Raskin said. "Third-party servicers earn money through annual servicing fees, a myriad of other fees, and on float interest, and they maximize profits by keeping their costs down, streamlining processes wherever possible, and by buying servicing rights on pools of loans that they hope will require little hands-on work."
Because a servicer's interests are indirectly connected to the performance of a loan, she said, they maximize fees and minimize expenses while performing the bare minimum of tasks set by the investor.
"In the case, for instance, of a homeowner struggling to make payments, a foreclosure almost always costs the investor money, but may actually earn money for the servicer in the form of fees," Raskin said. "Proactive measures to avoid foreclosure and minimize cost to the investor, on the other hand, may be good for the homeowner, but involve costs that could very well lead to a net loss to the servicer."
Raskin said this problem is a fundamental misalignment of interests, and that servicers focus more on short-term profit rather than long-term goals and practices. Ultimately, she called for more regulation.
"Until a better business model is developed that eliminates the business incentives that can potentially harm consumers, there will be a need for close regulatory scrutiny of these issues and for appropriate enforcement action that addresses them."
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