The qualified mortgage rule is not the only change pressuring the mortgage market this week. Come Friday, smaller mortgage servicers will be grappling with increased costs from new servicing guidelines that will change how servicers handle borrower notifications, interact with customers and organize their infrastructures, Fitch Ratings analysts say.
The outcome is unknown, but Fitch predicts the potential for more market consolidation as servicing shops group up to handle the onslaught of requirements impacting the space. This is not the first time analysts have forecasted a partner-up mentality in servicing. Two years ago, analysts started calling the new CFPB rules a market-changer for servicers.
"While these changes are expected to be impactful in 2014, many large servicers have already made significant progress towards meeting the January 10, 2014 deadline, in particular those servicers subject to mortgage servicing consent orders issued previously by government regulators," Fitch analysts wrote. "Where the potential problem lies, however, is with smaller independent/non-bank servicers."
The irony is many of these smaller, nonbank servicers acquired mortgage servicing rights in 2013 as part of a mass sell-off in which larger servicers began offloading underperforming loans, the ratings giant pointed out. For the most part, reaction from the mortgage servicing industry is inline with the Fitch report, with one source saying he solved the issue through technological investment. While he would not say what exactly he invested in, he did say a similar adjustment could help others.
"Companies will have to adjust their operating model and use technology to see if they can drive down their costs," the source tells HousingWire. "Servicers are required to maintain larger compliance staff, which will be a fixed cost, and the larger the scale, the easier to digest it."
While many of these smaller independent servicers keep their businesses in line using modern servicing technology – and perform well doing so – the new rules bring challenges as compliance costs go up.
"The cost of compliance with the new guidelines has likely raised the minimum number of loans that a company has to service in order to remain profitable; i.e. to spread the increased cost over more loans," Fitch wrote.
Unfortunately, the smaller servicers are not as equipped to handle the increased operational expenses that come with the new compliance guidelines.
"Mortgage servicing is a cost-control and cost-competitive business function, and the new CFPB regulatory requirements will likely pressure this further," the report concluded. “It is also expected that this environment will cause further pressure for consolidation in the servicing industry. Fitch will continue to monitor the effectiveness of individual servicers as they seek to incorporate the important guidelines of the CFPB and other regulatory requirements into their business practice."
But Kevin Kanouff, president and CEO of Statebridge Co., says the success rate of smaller firms is contingent on how you 'define small servicer.'
"I believe that Fitch is generally talking about servicers like Ocwen and Nationstar, and yes, it is likely that the new regulations will increase costs for them," Kanouff told HousingWire.
"This is because they will have to revamp their operations to address some of the high touch requirements of the regs, such as continuity of contact, which companies like Statebridge already have. Also, costs of compliance will go up for all servicing operations as a result of technical requirements of the regulations. To implement these technical changes, for example changing how servicers provide notices to borrowers, Fitch is pointing out that the smaller the operation, the larger the impact on the bottom line because the cost of the compliance is fixed, thereby impacting smaller operations disproportionately," Kanouff explained.