Reshuffling of Mortgage Servicing in the US
June 2014
Reshuffling of Mortgage Servicing in the US Overview Since early 2005, the US mortgage market witnessed extreme volatility with a boom during 2005-07, followed by a collapse which added to the economic slowdown. As the economy recovered from the 2008 mortgage crisis, record-low interest rates together with several government-led incentives gave an impetus to the industry in 2011-12. Homeowners hurried to get their mortgage loans refinanced to benefit from the improved interest and better lending terms. According to the Mortgage Bankers Association (MBA), mortgage origination volumes increased to USD597 Bn in Q4 2012 from a low of USD246 Bn in Q1 2011. However, the trend reversed in 2013, with the refinancing wave dying down and the increase in fresh mortgages unable to counter the decline in refinancing. MBA reported just over USD400 Bn in mortgage originations for Q3 2013, which is estimated to reach USD300 Bn in Q4 2013. Mortgage applications, as of March 2014, were down 54% from a year ago, primarily due to reduction in refinance applications (down 65% y-o-y).
US Mortgage Servicing From the servicing point of view, 2013 was mostly a year of regulation and consolidation. As per the OCC Mortgage Metrics Report, Q4 2013, released by the US Office of the Comptroller of the Currency (OCC), the overall performance of mortgages in 2013 improved from 2012. • •
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Percentage of mortgages that were current and performing at the end of Q4 2013 were 91.8%, compared with 89.4% same period in 2012 Similarly, percentage of mortgages that were 30 to 59 days past due declined to 2.6%, a fall of 8.7% compared to the previous year, and percentage of mortgages in the foreclosure process declined by 45.9% in the same period to 523,528 Refinancing activity continued to decline through Q3 2013, and the ratio of mortgage applications for purchase vs. refinance doubled in 2013
Selling of Mortgage Servicing Rights (MSRs) In the wake of the financial crisis, big banks like Morgan Stanley, Bank of America Corp., Goldman Sachs Group, Inc. and Wells Fargo are facing stringent capital requirements, making them offload rights to manage residential mortgages to non-bank entities. These non-bank companies, including Ocwen Financial Corp., Nationstar Mortgage Holdings Inc and Walter Investment Management have been buying up hundreds of billions of dollars worth of MSRs. These non-banks companies have almost doubled their servicing portfolio in 2013. According to Inside Mortgage Finance, in 2013 about USD1.03 Tn of mortgage servicing rights were sold, with the majority going to non-bank companies. Of the 30 large mortgage servicers in US including bank and non-bank firms, non-bank firms hold a 17% market share at the end of 2013, up from 9% in 2012 and 6% in 2011.
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Sale of MSRs to non-bank entities has not gone down well with the regulators. Questions are being raised whether such non-bank firms have the capacity to service these many loans. Few non-bank firms have already run into trouble over their handling of customers' mortgages. In December 2013, Ocwen reached a USD2.1 Bn settlement with the Consumer Financial Protection Bureau (CFPB) and state regulators over allegations that the company charged unauthorized fees and failed to properly credit borrowers' accounts and other issues. In February 2014, the New York Department of Financial Services blocked Ocwen Financial's deal to acquire the rights to service USD39 Bn of mortgages from Wells Fargo & Co., the largest home loan servicer in the US, stating concerns about Ocwen's ability to handle more loans given complaints the agency has received from consumers.
"The Basel rules are certainly welcome, but they appear to be having this unintended consequence on some of the banks desiring to shed these" assets, "I don't think that's such a bad thing. We're not saying that nonbank servicers can't do this. Our concern as a regulator is capacity." – Benjamin Lawsky, Superintendent of the New York Department of Financial Services
CFPB Supervision in Mortgage Servicing A report issued by CFPB in January 2014 highlighted unfair and deceptive practices in the mortgage servicing market. CFPB examiners have identified law violations relating to servicing transfers, waivers of rights in loss mitigation agreements, payment processing, furnishing of information to consumer reporting agencies and various issues arising from servicing of defaulted loans. With effect from January 2014, CFPB issued new mortgage servicing rules relating to the debt collection, credit reporting, and student loan servicing markets. The major focus of this regulation is to improve the information borrowers receive from their servicers, enhance the protections available to them to address servicers’ errors, and form some standard servicing requirements which will provide additional protections for consumers who have fallen behind on their mortgage payments.
Conclusion Selling of MSRs to non-bank entities is creating concern among federal and state regulators about the level of oversight and capital requirements in these entities. The new rules issued by CFPB will ease ambiguity for servicers and home owners and are expected to bring much-needed reform to the servicing industry. However, since the rules are so complicated and require a high degree of technological capabilities to ensure compliance, not all industry participants have currently adopted the changes into their operations.
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