Last December the Mortgage Bankers Association (MBA) assembled a task force to examine and issue recommendations for the future of residential mortgage servicing. That group, the Council on Residential Mortgage Servicing for the 21st Century is led by Debra W. Still, President and CEO of Pulte Mortgage and composed of key MBA members. That group has released its first product.
The white paper titled "Residential Mortgage Servicing in the 21st Century" provides information on what a servicer does; how a servicer is compensated; and the perspectives of consumers, regulators, and the legal community with regard to servicer performance in the current crisis. It also identifies issues that need further examination and examines trends in servicer compensation and expenses. It is meant to provide an educational background as well as an "environmental scan" of the events leading up to the current housing and mortgage crisis.
Much of the material in the paper grew out of a summit which included industry leaders, consumer advocates, economists, academics and policymakers "who took a detailed look at the issues that have challenged the industry and started to process of identifying the essential building blocks for the future of servicing." Summit participants identified three major areas for further study and development of policy recommendations.
- A review of existing servicing standards and practices especially in the area of dealing with large volumes of non-performing loans, foreclosure practices, and loss mitigation practices.
- Evaluation of the legal issues related to the foreclosure process, chain of title, and other issues.
- Analysis of proposed changes in servicer compensation proposed by the Federal Housing Finance Agency (FHFA). Ginnie Mae and the government sponsored enterprises (GSEs).
The report is based closely on the summit proceedings and, in line with the composition of the presenting panels, looks at the issues from the perspectives of the Secondary Market, the Servicer, the Regulator, the Consumer and the legal issues.
Secondary Market Perspective
The general themes that emerged from this discussion are the need to increase predictability and flexibility while decreasing volatility and concentration risk. Some participants felt that an alternative to the existing I/O strip method of calculating servicing fees would decrease volatility but that raised the issue of who would absorb the volatility in servicing fees in an ecnoomic downturn, the investor or guarantor. To be flexible it was suggested that servicing rights should incorporate factors that reflect market conditions so that the fee varies accordingly. However, the market's desire for certainty and predictability runs counter to a flexible approach to calculating servicing rights.
Ideally, the calculation method also should be designed to improve the ability of firms to hold servicing rights regardless of their size or structure. This would address the existing concentration risk and the lack of excess capacity in the servicing industry to absorb dramatic changes in volumes of loans requiring extra attention.
Shortly after the summit FHFA released information on four types of servicing fees structures that it was considering for Ginnie Mae and the GSEs. Each of the proposed alternatives relates to performing loans and the guarantor would pay the servicer or special servicer additional fees for each non-performing loan on the basis of a flat dollar amount per loan per month based upon stage of delinquency.
Regulators' Perspectives
Three regulators addressed participants at the summit; Sheila Bair, Chairman, Federal Deposit Insurance Corporation; David H. Stevens, Assistant Secretary for Housing and Commissioner of the Federal Housing Administration (now CEO of MBA), and Richard Neiman, New York State Superintendant of Banks.
The three addressed the idea of setting common standards for the residential mortgage servicing industry which would include a national servicing standard especially for foreclosure and default administration. Other standards would address human resource issues such as adequate staffing to deal with large numbers of delinquent loans, a single point of contact within the servicer for distressed borrowers, and adequate training for staff.
Council members met with other regulators and the paper discusses some of their suggestions and proposals such as a "short refinance" program that would enable homeowners facing foreclosure to refinance into a mortgage based on current interest rates and home values.
Legal Perspective
The summit looked at four major legal issues relating to residential mortgage servicing.
- The sufficiency of foreclosure documentation and attestation policies and procedures.
- Chain of title issues.
- Fees and lender-placed insurance.
- The MERS mortgage registry system.
Another fundamental issue was the role of the trustee. From the consumer viewpoint the servicer is an indirect agent of the investor through a trustee, but it can also be an agent or contractor. The servicer's legal rights and obligations are controlled by a variety of legal documents.
Consumer Perspectives
A panel of representatives from consumer groups gave attendees perspectives about servicing practices form the borrowers' point of view, especially as relates to defaults. The panel told the audience that servicers have lose the trust of consumers.
One suggestion that came from the panel was the establishment of a Resolution Trust type of entity to acquire troubled mortgages. This would put those loans in the hands of someone with different priorities than the current investor and servicer.
The panel also suggested that the servicing fee structure should include incentives to modify mortgages and that servicing standards need to be more transparent. The consumer advocates also suggested changes in the rules governing initiating modifications during foreclosure in order to eliminate dual tracking but still allow an avenue for borrowers to avoid foreclosure.
Servicer's Perspectives
The report concludes that current research on servicing do not accurately reflect current practices or fail to accurately state the costs and revenues inuring to servicers with regard to delinquent loans. The single greatest financial incentive for a servicer to support modifications over foreclosure is the resumption of servicing income which ceases during the period of delinquency. Under private label servicing the servicer is reimbursed the lost revenue when the REO is sold but without interest. In the case of GSE and FHA servicing that revenue is permanently lost when the loan is foreclosed.
Servicers are also obligated to advance mortgage payments to investors even when the consumer is not paying and to advance other funds such as property taxes and insurance premiums. The servicing agreement governs how and when they will be repaid but the advances might be outstanding for years in the current market. Third party fees are treated in much the same way. Again, a modification means that the advances stop and the servicer is repaid through capitalizing the outstanding balances.
Modification rather than foreclosure also allows the servicer to keep the fair market value of the asset on its balance sheet and thus increase the value of the portfolio if purchased.
Most studies of servicing overstate the true worth of late fees which are often waived during modifications, are not reimbursed through foreclosure, and do not generate interest. Furthermore, there are no penalties to the borrower for not paying these fees when the loan is brought current and the servicer may have to wait until the mortgage is retired or the house sold to collect.
The report pushes back against calls for eliminating dual track and for a single point of contact. The general concern seems to be the cost of delaying foreclosure because of penalties for the investor and the cost associated with legal advertising, the advances mentioned above, and the possibility of continued decline in property values. There are also potential conflicts with state foreclosure laws.
The single point of contact may, the report says, have unintended consequences because assigning one person is impractical. The contact person would have to deal with fluctuating call volume which could significantly increase delays; would have to be cross-trained in a variety of specialties (i.e. modifications, short sales) and the system raises concerns about work schedules, staff turnover, illnesses, etc.
The entire report can be read here.
