The threat of the new servicing standards has been looming over servicers of all sizes for quite some time, and the deadline to implement new policies and procedures to accommodate the new regulations has finally passed. With this new servicing landscape comes thinner margins and constant fear of being cited by the Consumer Financial Protection Bureau for not meeting regulatory requirements, but have all of the attempts to revive the housing marketreally improved the state of the servicing industry? Let’s take a look.
In the fourth quarter of 2009, the seriously delinquent (or 60-plus and foreclosure) reached an all-time high of 10.3%, but by last year's third quarter, delinquencies fell as low as 6%—meaning a positive trend of decreased delinquencies. Furthermore, about 10% of the industry’s loans are through a retention or modification program, mitigating the amount of stress put on the servicers as well as the borrower.
These numbers certainly illustrate a move in the right direction and ultimately a new dawn in the servicing market. However, many servicers are still struggling to remain a successful and profitable operation due to the drastically increasing operational costs, decreased margins and growing dissatisfaction among borrowers. A closer look at the data beyond reported delinquencies will shed more light into this disconnect between the decrease in delinquencies and the positive effects these numbers should have on today’s servicers.
For instance, the majority of the industry relies on the Office of the Comptroller of the Currency’s quarterly report for the latest delinquency metrics. The OCC's comprehensive report provides a statistical overview of the mortgage portfolio, loan modifications and foreclosure actions of seven national banks and one federal savings association. Even though the number of institutions required to report to the OCC has fluctuated throughout the years, the profile of these institutions has generally remains the same.
The OCC's report has uncovered one noteworthy trend over the past two years—these institutions are reporting reduced portfolios, as well as an increase in the sale of these portfolios to non-reporting institutions, like nonbanks.
As a result, the number of loans used to calculate the OCC's dataset has shifted. The 2009 report was based on about 34 million loans—or 60% of the industry—whereas the third-quarter 2013 report was based on about 25 million loans, only 44% of the industry. It is important to note that the OCC's dataset is still sound and does not discount the decrease in delinquencies, but one can only assume that the institutions that significantly reduced their portfolio would have first sold off their nonperforming or loss-making assets.
Furthermore, only 42% of the 3.2 million loans that have been modified since 2008 are current while 24% are seriously delinquent, in foreclosure or already foreclosed. Another 24% are no longer being reported as they were sold to non-reporting institutions.
Based on this analysis, is it possible that delinquencies have not declined, but rather just moved from one player to another? There is no doubt that there is a shift in the servicing market regardless of the exact number of delinquencies. Previously there were a few larger institutions assuming the majority of the risk, but now this risk is more evenly distributed across smaller institutions.
To eliminate the challenges the larger reporting institutions have historically faced, these new entrants must maintain consistent, open communication with their borrowers to ensure they make their payments on time. Servicers should also educate their delinquent borrowers on how to get current with their payments. Implementing new technologies or processes may be a necessary step to avoid these servicing issues, as well as build a scalable model than can handle an increase in loan volumes.
Ultimately the key to servicing the new landscape is flexibility to scale rapidly without being tied to fixed costs. Servicers must be able to adapt based on the market’s current demand, specifically regarding compliance requirements.
Compliance management is an ongoing, constant process and is not a one-time fix—maintaining compliance must be a permanent fixture in servicers’ operations. As servicers leverage industry innovations to help their businesses, one can expect future delinquency reports to truly reflect the new servicing landscape.
Shashank CM is the associate director of servicing solutions for ISGN.