Specialty mortgage servicers: what's the big deal?
A niche group of mortgage servicers known as nonbank specialty servicers has grown explosively over the past three years, triggering increased scrutiny by financial regulators. We explore the causes of this surge and the concerns it has generated in detail in our recently released commentary Nonbank Specialty Servicers: What's the Big Deal? and briefly in this post. Ultimately, we acknowledge the significance of the concerns, but caution regulators not to stifle these niche servicers, which are effectively addressing the unprecedented number of distressed loans still working their way through the mortgage system.
A niche group surges
Mortgage servicers perform all of the administrative work required once a borrower begins making monthly payments on a mortgage loan including receiving and processing the payment, maintaining accurate records on the mortgage, collecting and paying taxes and insurance as needed, and chasing down past due payments. Nonbank specialty servicers focus on troubled loans.
Ninety percent of mortgages are still serviced by commercial banks which are the traditional mortgage servicers. But the volume of loans managed by nonbank specialty servicers has grown in recent years at a remarkable rate—between 30 and 350 percent—while servicing by the largest bank servicers has stagnated or declined.
Three factors fueled this growth:
- Traditional servicers became overwhelmed by the volume of troubled loans and sold the servicing work of those loans to the nonbank specialists;
- Recognizing the increasing capacity of these servicers, regulators encouraged the banks to continue transferring the servicing work;
- Unrelated regulatory changes encouraged banks to reduce their servicing portfolios.
Regulators get nervous
As servicing volume has increased for specialty servicers, however, key regulators at the state and federal level have become increasingly nervous that these nonbanks are not regulated or supervised in the same way as banks.
What’s the big deal?
The concerns about these servicers come down to four main issues, each of which we explore in detail in our commentary:
- Capacity: Critics claim that recent increases in employee workload and the high number of offshore employees show that the industry has failed to develop an adequate infrastructure to keep up with its rapidly increasing portfolios.
- Service to borrowers: Critics claim that the data on consumer complaints, borrower outcomes, speed to resolution, and the number of loan modifications achieved show that servicers cannot transfer tens of thousands of troubled loans without interrupting service to distressed borrowers.
- Business affiliations: Several large specialty servicers have developed business affiliations with, and even acquired, companies handling loan resolution, including originators, securitizers, and foreclosure management firms. Servicers argue that this vertical alignment allows them to work more efficiently to resolve loans, but regulators are concerned that these affiliations may encourage self-dealing that is not in the best interests of borrowers.
- Financial risks and regulations: Ultimately, regulators need to resolve the question of how much regulation is appropriate for these nonbank servicers, since they face many of the same risks as traditional servicers (i.e. interest rate and prepayment risk) as well unique volatility and liquidity issues.
A call for balance
Industry participants and observers must continue to assess the available evidence to reach agreement on the standards to which we should hold these niche servicers. In the meantime, it’s critical that regulatory efforts strengthen and not inhibit this effective mechanism for addressing distressed loans.
Photo: Thousands of South Carolina homeowners seek free counseling during a three day event that started Friday March 13, 2009, in Columbia, S.C. The Neighborhood Assistance Corporation of America's "Save the Dream Tour" came to help people keep their homes by restructuring mortgages and permanently reducing the interest rates of at- risk homeowners.(AP Photo/Mary Ann Chastain)