The growing market presence of independent mortgage servicers has been met with calls for new rules and higher capital standards. And like many post financial crisis regulatory reforms, it’s critically important that state and federal regulators get the balance right to ensure that the rules are harmonized and preserve a deep, liquid market for mortgage servicing assets that encourages high quality servicers – whether bank or independent, small or large – to stay in the business and serve consumers.
For starters, a little perspective is needed. The presence of independent mortgage servicers in the top servicer rankings is not a new phenomenon requiring a dramatic regulatory response. In the late 1980s and early 1990s, nondepository mortgage bankers were major players in the servicing market. It is also important to note that today these servicers still comprise less than 20% of the current market. The changes that have occurred are due to the effects of the financial crisis as well as the resurgence of the originate-and-retain servicing model.
Another driver of the growth of independent mortgage servicers is government policy itself. The Basel III risk based capital rules impose an unnecessarily high capital requirement on bank holdings of mortgage servicing rights (MSRs), encouraging some banks to shed servicing assets or limit their growth by exiting the correspondent and wholesale lending markets.
In addition, while under government conservatorship, Fannie Mae and Freddie Mac encouraged the growth of independent “specialty servicers” at the height of the crisis by moving portfolios of seriously delinquent loans to companies that employed higher touch techniques to reach borrowers. Treasury created the Making Home Affordable program, feeding the growth of specialty servicers that deployed large teams of employees dedicated to following the intricate and fluid HAMP processes and procedures.
On the whole, this growth and diversity in mortgage servicing is a positive development. The resurgence of independent mortgage servicers has resulted in a healthy de-concentration of servicing following the financial crisis. As independent mortgage bankers return to the originate-and-retain servicing model, more servicing is staying local and more mortgage bankers have a heightened commitment to the long-term performance of the asset. Increased servicer diversity also addresses the frustration that arose during the crisis with difficulties in moving servicing from troubled or poorly performing servicers. Today, specialty servicers are devoting more intensive resources to assisting troubled borrowers, developing innovative loan modification programs, and preserving value in distressed loan portfolios.
As policymakers worry about encouraging access to credit, it is important that they understand that the servicing asset is a critical part of the mortgage value chain. If capital requirements on servicing assets are set too high or if overly onerous rules expose companies to excessive costs or risk, fewer companies will invest in the asset, the price will drop and rates paid by consumers will rise.
Against this backdrop, it is vital that state and federal regulators act judiciously. Key issues for regulators to consider going forward include:
- Capital and liquidity standards for independent mortgage servicers should be harmonized and consistent. FHFA’s recent proposal to align Fannie Mae and Freddie Mac servicing standards needs some fine-tuning, but is a good first step toward harmonization across the federal guarantors and the states.
- Punitively high capital standards – like those in Basel III – will result in fewer servicers, more concentration risk, and higher costs for consumers;
- The Consumer Financial Protection Bureau has set a national standard for how servicers and consumers interact; we need to let those rules work before creating new ones.
- Consumer protections for delinquent borrowers should hold servicers accountable while recognizing the inherent complexity of default servicing. Like the National Mortgage Settlement, consumer rules should recognize the need for tolerances around established performance standards.
- Collectively, servicing rules should preserve the ability to easily and efficiently transfer servicing and access liquidity for financing servicing activities. A deep, efficient and liquid market for MSRs benefits consumers by attracting investors and keeping mortgage rates lower.
There are many business models and charters under which mortgage servicing activities are conducted. Performance, capacity and service quality should be the primary drivers of market share in servicing, not regulatory standards on one segment of the industry. Companies that want to service – and do it well – should not be discouraged from servicing by excessive capital standards or other onerous regulations that undermine the value of MSRs.