In Mortgage Servicing the Devil's in the Details

MAY 15, 2013 6:18pm ET

Mortgage servicing is on the move as the largest banks, motivated in part by looming capital requirements, have already unloaded as much as 35% of their servicing portfolios to nonbank servicers.

At the same time, small and midsize financial institutions and nonbanks look to steady their income stream by retaining servicing in lieu of servicing release premiums.

As a result of weak economic factors, rates continue to trend lower.

In fact, Freddie Mac's 15-year rate is at an all-time low at 2.56% and the 30-year rate is pushing the bottom. Low rates that contribute to a longer life of a loan, coupled with the current quality underwriting standards, will stabilize servicing books and result in a more attractive income generator over the next few years as income from refinance volumes fall off.

Lenders entering or re-entering the servicing space should be compelled to consider a key hurdle, however, adhering to new operational and compliance standards. Not to be taken lightly, violation of the new mortgage servicing rules is a serious and costly matter.

For example, New York's attorney general announced plans to sue two of the top five mortgage servicers for failing to adhere to modification application processing timelines.

While the mortgage servicing standards are intended to set a guiding path to safety and soundness, the devil’s in the details and the responsibility to comply falls squarely upon the servicer.

The alternative would be to risk penalties and fines of up to $5,000 per day per violation, up to $25,000 per reckless violation and up to $1 million per day for a known violation of any law, final order or condition.

Current and new entrants in the servicing space must acquaint themselves with the CFPB rules for routine servicing, default and foreclosure in order to maintain a profitable and compliant servicing business. But many servicers cannot afford the increased headcount typically required to remain compliant.

It is a Catch-22—risk severe fines or add staff to meet regulatory requirements—either way takes a toll on profitability.

The solution to this dilemma can be found in outsourcing compliance reviews and automating compliance.

To efficiently maintain regulatory compliance while lowering costs and increasing profitability, servicers must leverage an outsourced experienced team focused solely on staying abreast regulatory changes. In turn, institutions are able to focus on their core competencies and drive profitability.

Lisa Weaver is senior vice president of mortgage solutions for ISGN.

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