NMS Monitor: Is the 30-year mortgage the best product?

Challenges attendees at ABS East to “do something better"

During Tuesday's keynote address at ABS East, Joseph Smith, monitor of the National Mortgage Settlement, issued a challenge to the conference’s attendees, encouraging them to create a mortgage product that allows borrowers to build up equity faster and own their homes sooner.

“Believe it or not, and this is worth the price of your admission right here, the 30-year mortgage is not a constitutional or human right,” Smith told conference attendees. “Is the 30-year mortgage the best product? A lot can happen to borrowers over those 30 years. It has the opportunity to put borrowers at risk for a very long time.

“We should build some additional products to help borrowers. I challenge you to do something better, to help borrowers own their houses faster.”

Smith said that the 30-year fixed-rate mortgage might not be the best loan for all borrowers in today’s climate. Smith suggested that lenders consider alternative loan products like 15-year loans with options that would allow borrowers to build up equity quickly and pay off the note faster.

“Let’s look forward and build a mortgage finance system that works for the 21st century,” Smith said. “We need to cast aside the legacy systems and build for the future.”

Smith made the comments in his speech titled, “Balancing Efficiency and Fairness in Mortgage Finance.” During his speech, Smith said that the easiest way to balance efficiency and fairness is to reduce the default rate and “keep it low.”

Smith suggested that one way to keep the default rate low is to encourage high quality credit counseling as part of the underwriting process.

Smith said that the cost of the counseling could be absorbed by the lender, shared between the lender and borrower, or even paid in full by the borrower. “If someone who wants to borrow hundreds of thousands of dollars can’t stump up a few hundred for counseling and take the time to attend classes and pass a test, that person isn’t ready to borrow," he said.

Smith also provided an update on the work of the Office of Mortgage Settlement Oversight and the National Mortgage Settlement and the mortgage market as a whole. “Reconstruction of the mortgage finance system is still a work in progress,” Smith said.

“The restoration of public trust is turning out to be a tough nut to crack.”

Smith said that he hopes that the work of his office and the results of the NMS have served to regain some of the public trust that was lost in the aftermath of the financial crisis.

“I hope the work that we have done has been a step in the right direction,” he said.

Smith also spoke about the results of the ongoing examinations of the mortgage servicers that are subject to the terms of the National Mortgage Settlement.

The mortgage servicing activities of Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and Ocwen Financial (OCN) and Green Tree Servicing (the two companies that purchased servicing rights from ResCap after the company was reorganized through bankruptcy), are still monitored by the Office of Mortgage Settlement Oversight.

In a May update from the NMS, it was revealed that Green Tree failed eight servicing compliance tests in its first round of compliance testing.

“After extensive testing, I can confirm that Green Tree failed eight metrics,” Smith said at the time. “These results show that Green Tree must make significant changes to improve its practices and comply with the Settlement.”

Walter Investment Management Corp. (WAC), which owns Green Tree, issued a statement after the compliance test results were released, saying that it has already begun to address the root causes of the non-compliance. "Green Tree is committed to maintaining a highly compliant environment that focuses on high standards of customer service," Mark O'Brien, chairman and chief executive officer of Walter Investment said at the time. "We are dedicated to addressing these issues in a timely manner and are confident that the implementation of our corrective action plans will result in a positive outcome during our next review cycle."

During Smith’s speech at ABS East, he said that for many servicers, most of the subsequent servicing compliance testing failures have come as result of changes in the regulatory requirements.

“Changes are where we have problems,” Smith said. “For large organizations, changing anything is an event.”

Smith said that he hopes that the compliance standards and testing that are part of the NMS serve as a “prototype” for lenders and servicers going forward. “It’s about striking a balance between cost and benefit, for lenders and borrowers alike,” he said.

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