Force the giant, "efficient" servicers to do their homework--which is what both the bankruptcy trustees and the foreclosure judges are doing--and you just "added back" the costs of doing business that the consolidation and automation and outsourced-legal work processes were supposed to subtract out of the whole thing. Do enough of that, and all of a sudden it's as expensive for a Countrywide to service a $1.5 trillion mortgage portfolio as it is for ten small regional servicers to handle $150 billion a pop ... What we are seeing here on both the foreclosure and the bankruptcy front is a movement toward having to deal with the true costs of secured lending: the costs involved in maintaining one's security and liquidating it in the event of default. That is going to change the math of securitization economics as well as the profitability of mortgage servicing operations, and that is going to directly impact the consumer in terms of curtailing easy credit and increasing the cost of mortgage financing.Bingo. HW readers have likely read my own commentary a few days back on the issue of assignments in foreclosure filings, which highlighted the changing landscape for default management as well. Servicers and their outsourced legions are going to have to adjust quickly to this new reality, where every foreclosure case, every bankruptcy filing is an open invitation for strong scrutiny from both judges and regulators. And this isn't a particularly bad thing: there are plenty in the servicing and default management side of the mortgage industry that have been screaming about the need for due diligence and risk control for years. Servicers -- and in particular, the outsourcers they hired to manage massive networks of local contractors covering things from BPOs to eviction trash-outs -- are now likely to be forced to invest in all of the things they or their agents once refused to pay to do. That will undoubtedly change the business model for many servicers, and it will be interesting to see how that affects the industry going forward.
Countrywide Investigation Underscores New Reality in Mortgage Servicing
Servicing mortgages is a low margin business, mostly -- mortgage servicing rights are certainly becoming more valuable as a hedge these days, as Countrywide noted in a presentation at the FBR Investor Conference yesterday, but not valuable enough to offset portfolio losses elsewhere for a large lender/servicer conglomerate. I bring this up because Countrywide's servicing operations are clearly under the microscope; Gretchen Morgenson over at the New York Times reports this morning that the Calabasas, Calif.-based lender has been subpoenaed by the United States Trustee to determine "whether the company's conduct in two foreclosures in southern Florida represented abuses of the bankruptcy system." The trustee will examine mortgage notes, payment histories and borrower correspondence to examine if Countrywide had a valid claim to the properties and that it had correctly calculated any arrearages. Tanta at the Calculated Risk blog offers strong commentary on the new reality emerging in the servicing industry: