The 27 participants in our eight-hour discussion at the first Mortgage Servicing Collaborative meeting on May 2 shared their concerns about mortgage servicing, their expectations, their hopes for the Collaborative, and their views on the best way to proceed with the work. Three of the day’s most consistent themes were the issue’s complexity, the need to establish trust in the industry, and the importance of keeping the focus on the borrower.
Before the discussion, the Urban Institute surveyed participants regarding their view of the challenges the Collaborative should address. The most common were as follows:
- Cost to service nonperforming loans
- Regulatory misalignment
- Challenges servicing Federal Housing Administration (FHA) loans
- Access to credit
- Servicing compensation
- Liquidity and capital requirements
- The next market downturn
Guided by these initial views and the day’s conversation, we discussed the following issues about the path forward.
The Collaborative’s General Approach
We will start with work on the “low-hanging fruit,” four or five issues we could reach consensus on quickly. These issues include fixing the FHA foreclosure and conveyance processes. We need to identify areas where interests are aligned and identify the problems and their causes before we move to solutions and rank the problems in order of magnitude. Defining the entire servicing system and understanding how any changes will affect other parts of the system are important.
Problems to Address
Problems we discussed include liquidity, the high cost of servicing loans, regulatory complexity and inconsistent enforcement, how to move from low- to high-volume delinquency periods with a consistent consumer experience, the lack of regulatory and investor harmony, how to keep big banks involved (big banks are healthy for the whole system, even though servicing will never be a profit center like credit cards and deposits), the need to create cost efficiencies, and investors’ need for consistency and predictability to price.
Data and Research Needs
We discussed several data and research needs, and a comprehensive list is in development. Topics include the FHA conveyance process; costs and severities; what is included in servicing costs, and how that has changed; contributors to the various costs; whether a residual income test would be helpful; how performance levels differ at 30, 60, and 90 days; and what best practices and outcomes have been identified.
For best practices and outcomes, we should answer the following questions: What did and did not work during crisis? Which borrowers avoided default? Which policies best minimized the amount lenders lost? What is most effective, for example, if a short sale has a lower severity than a foreclosure, and is a short sale the best outcome? How can we ensure the borrower drives choices and understands choices and outcomes?
We need to keep in mind all participants’ perspectives and concerns. Participants include the servicer, investor, community representative, consumer advocate, customer (borrower), lender, credit-risk transfer owner, regulator, legislator, courts, and the public. Begin by analyzing where participants’ goals do and do not align.
Trust in the industry has deteriorated. Borrowers don’t think servicers are looking out for their best interests, partly because the public doesn’t hear about positive experiences. We also have the challenge of distinguishing servicers from the “financial service” industry, which some see as attempting to roll back consumer protections. To counter this, we must consistently talk about how changes will improve the process and outcomes for consumers.
Everyone needs to be smarter on servicing. Few recognize how complicated the process is and how the pieces connect. And the conversation about homeownership in general needs more diverse voices.
Nevertheless, given the difficulty of passing federal legislation in the current political environment, servicing may be an attractive issue for the administration to work on.
Following the inaugural meeting, Housing Finance Policy Center staff circulated a draft proposal for the initial work stream that had been agreed to at the meeting:
Work Stream I: The major challenges facing servicing mortgages insured by the FHA, the US Department of Veterans Affairs, and the US Department of Agriculture.
Participants have been asked to work on one of two issues:
- The FHA’s foreclosure and claims and conveyance processes
- Loss mitigation and loan modifications options
The first work stream meeting will convene on Wednesday, June 14, at the Urban Institute.
The Housing Finance Policy Center is finalizing the second work stream, which will focus on improving efficiency and effectiveness and simplifying servicing in ways that benefit consumers.