DS News

» VISIT US ONLINE @ DSNEWS.COM 23 REGULATORY CHANGES, REPUTATIONAL RISK, ECONOMICS ARE FACTORS IN SHIFT TO NON-BANK SERVICING e rules for originating a mortgage changed in the seven years since the housing crisis, which in turn changed the loan servicing sector and caused a transition of servicing from banks to non-depository institutions. e material shift of concentration of top- ten residential mortgage loan servicers from banks to non-banks can be attributed to three factors: regulatory changes, reputational risk, and basic economics, according to CoreLogic SVP of government affairs, Faith Schwartz, in CoreLogic's April 2015 MarketPulse. Where regulatory changes are concerned, the BASEL III implementation and the Consumer Financial Protection Bureau (CFPB) guidelines have had the most impact on the shift of mortgage servicing from banks to non-banks. BASEL III placed capital constraints on many of the larger financial institutions in the United States with sizable mortgage servicing rights (MSR) portfolios, and the changes in capital standards led these institutions to rethink their approach to their MSR holdings, according to Schwartz. Also, the CFPB has imposed more stringent guidelines for servicing, borrower engagement, and document management, which has resulted in institutions paying out more than $100 billion in settlements since the crisis. Reputational risk "remains high with regard to any and all foreclosures," Schwartz said. e crisis gave regulators the ammunition they needed to create loan servicing-specific legislation and policies, which put at strain on collections and default at many institutions. ere were also a number of challenges that magnified industry problems, such as light contact with the borrower, inconsistent collection of information from the borrower, and the challenge of creating uniform processes, according to Schwartz. On economics, Schwartz said post-crisis, the Dodd-Frank Act and subsequent creation of the CFPB led to many consumer protection laws that were enacted to slow down the foreclosure process as the servicing world shifted from a traditional loss mitigation role to that of a borrower solution provider. Also, the average cost of loan servicing skyrocketed; the Mortgage Bankers Association and Urban Institute estimate the cost of servicing performing loans jumped from $59 in 2008 to $159 in 2013, while the average cost of servicing non-performing loans spiked from $482 to $2,357 during the same period. While the shift in servicing from banks to non-depository institutions makes little, if any, difference to consumers, it has the potential to affect investors, according to Schwartz. "For investors, the shift in counter-parties to non-depositories can add additional risk as they are institutions with less capital than banks," Schwartz said. "But that can and is being managed, as agencies such as the Federal Housing Finance Agency and Fannie Mae continue to issue guidance and rules around minimum capital requirements and adapt to these changing players in loan servicing." While there are many metrics in place to monitor the performance of mortgage loan servicers, according to Schwartz, including: rating agencies, the CFPB complaint database, Treasury HAMP ratings, and Fannie Mae's STAR rating system, to name a few, Schwartz warned, "an area of caution regarding the role of servicing is that the cost of default servicing, as evidenced by recent studies, will materially impact the cost of access to mortgage credit."

• Cover