Increased regulatory requirements and growing reputational risks are leaving many large banks rethinking whether they want to continue to service mortgages. In their place are smaller institutions entering the market to take advantage of the opportunity.
These new mortgage servicers are typically regional and midsize banks, as well as newly formed organizations backed by private capital, said panelists during a session at the Mortgage Bankers Association's annual convention in Washington.
These smaller banks have a lot of cash and they're trying to make more loans and more investments because they don't have enough interest-earning assets, says Robert Caruso, executive managing director of default management services at Lender Processing Services.
He said it's now common for lenders to hold mortgages they originate in their portfolios, rather than selling them to the government-sponsored enterprises. At the same time, new requirements like the national servicing standards, and ongoing litigation and regulatory scrutiny are leading larger banks to reduce their involvement in servicing out of concern that problems in that line of business could negatively impact their other banking operations.
"The smaller players, whether it's a Nationstar or Ocwen, that don't have the same reputational risk concerns will continue to grow, while bank involvement declines."
While there has been a tremendous amount of private capital coming into mortgage servicing, "the new entrants need to understand this is an operationally intensive asset," says David Hisey, the chief financial officer of Nationstar Mortgage.
Another challenge for these new, smaller servicers is acquiring the domain expertise to handle loss mitigation, says Dean Demeritte, executive vice president of Phoenix Capital. While he considers the term "specialty servicing" an outdated term, "there will continue to be a need for companies that are adept to servicing delinquent loans."
"It's much more of a hands-on, high-touch environment and if you don't have the experience, it's a tough thing to learn," Demeritte says, adding that "the agencies are paying much more attention to that than they have in the past."
While the national servicing standards are creating a more consistent borrower experience across institutions, the panelists noted that government-incentivized loss mitigation programs will eventually end and servicers will have to re-evaluate when and how they offer loss mitigation.
"As we go forward, it's important to recognize that if you want good solutions for homeowners, you have to provide the right incentives to get there," Hisey says.
Loan workouts under the Home Affordable Modification Program have rising interest rates after five years, and Caruso said those efforts may lead consumers to seek additional reductions to their loan payments.
"I'm concerned that customers have gotten too used to hearing when they have a delinquency that they're going to get a mod," he says.