Mortgage servicers are “unsung professionals” who play a crucial role in the U.S. economy, Bloomberg says, but they’re not doing their jobs well.
But to be fair, it’s not all their fault.
What’s the problem? A recent article in Bloomberg breaks it down, claiming that the mortgage servicing sector needs a serious overhaul.
It all started with the housing crash, which made delinquencies skyrocket and servicers scramble to deal with the most labor-intensive part of the job.
Some had fee structures in place that disincentivized staff from helping borrowers escape foreclosure, and in cases where help was offered, it provided little relief.
On top of that, overwhelmed employees relied on robosigning to take care of the foreclosure notices that were piling up, and that led to some serious legal trouble.
“This made the housing crisis much worse than it needed to be, as unnecessary and sometimes wrongful foreclosures fed the vicious cycle of price declines, defaults and disintegrating neighborhoods,” Bloomberg writes.
Regulators stepped in after the crisis to right the obvious wrongs, but the new rules only created more problems, according to Bloomberg, and that’s what we’re left with today.
The Federal Housing Administration put safeguards in place to ensure deadlines were met, but those timing requirements have proven to be too strict, leaving servicers to swallow heafty fines when they can’t comply.
In fact, servicers breach FHA’s deadlines almost half the time, according to a study by the Urban Institute, which also found that the fines levied against them are enough to negate the revenue from 12 performing loans.
This has made the cost of servicing a non-performing loan five times more expensive that it was 10 years ago, Bloomberg notes, citing data from the Mortgage Bankers Association that pinpoints the cost at almost $2,500 compared with 2008’s $500.
The result has lenders tightening their standards, too fearful of the cost of lending to a borrower who may post a risk of expensive default.
The daunting costs have left lenders unwilling to take on even reasonable risks, avoiding many borrowers whom government insurers would otherwise approve, and this has hit minorities and low-income applicants the hardest.
Moreover, the risks associated with servicing have pushed banks out of the business, leaving the work to financial companies who aren’t as strictly regulated, and this is a problem.
“This is troubling, because crises place great demands on servicers’ cash and capital: They must keep making payments to lenders and investors even when borrowers aren’t paying them, and their rising expenses undercut the value of the mortgage-servicing rights that are among their biggest assets,” Bloomberg writes. “If they can’t handle the stress, they will leave borrowers and lenders in the lurch.”
Clearly, things need fixing. While Bloomberg refers to servicing as the “plumbing” of the mortgage market and calls fixes to the system a less-than-glamourous pursuit, it’s one that must be done, nonetheless.
Here are some solutions Bloomberg cites to help alleviate the problem, informed by studies completed by the Urban Institute.
1. Change the way servicers are paid.
Government rules dictate that servicers are paid by a portion of each monthly interest payment. This is enough to cover expenses when things are good, but not enough when a loan goes delinquent.
Bloomberg recommends a new fee structure that more closely aligns fees to costs, requiring servicers to build reserves and providing incentives when modification agreements are reached.
“The value of mortgage-servicing rights would become less volatile, because income would move more in sync with costs,” Bloomberg writes. “This would relieve some of the stress on servicers in crisis times, and might encourage traditional banks to return to the market.”
2. Empower services to make modifications that work.
FHA and Veterans’ Affairs rules prevent borrowers from keeping their original interest rate when they modify their loan. If rates are high, these borrowers are unable to lower their payments and are more likely to default.
“The remedy is simple: Give servicers more leeway to reduce payments without triggering an interest-rate reset, as Fannie Mae and Freddie Mac already do,” Bloomberg states.
3. Standardize data.
Different servicers record and track data in different ways, and that makes transferring a loan from one company to another extremely complicated and prone to errors. Bloomberg suggests Fannie and Freddie insist upon uniform standards, asserting that the rest of the industry would then follow suit.
Bloomberg concludes by acknowledging that not all the work is straightforward and that some may require a congressional mandate, “but as the suffering visited upon millions of American homeowners after the crash proved, it’s absolutely necessary to make these repairs before the system is tested again.”