Fates of Bank and Nonbank Servicers Intertwined: MBA Chair-Elect

MBA Vice-Chair Bill Cosgrove

The rapid growth and increasing regulatory scrutiny of nonbank mortgage servicers could "severely" affect the whole industry, Mortgage Bankers Association Chairman-Elect Bill Cosgrove said.

The value of servicing rights, the way servicers operate and "the future makeup of the industry" are at stake, Cosgrove told attendees at the MBA's National Mortgage Servicing Conference in Orlando Wednesday.

Noting that Basel III capital rules have led many banks to sell MSRs to nonbank entities, "creating the next generation of servicing," Cosgrove said changes to public policy and regulatory requirements would make an impact on nonbank and bank servicers alike.

"For this reason, we are keeping a very close eye on ongoing regulatory activities aimed particularly at nonbank servicers," Cosgrove said in prepared remarks. "Nonbank firms have become an increasing part of the servicing ecosystem, and it is clear that they have captured the attention of regulators and policymakers."

The rapid ascent of nonbank servicers has at times even concerned the firms' own investors, particularly given overall mortgage industry headwinds. Recently, New York regulators halted Ocwen Financial's plans to buy $2.7 billion in MSRs from Wells Fargo earlier this month, raising tough questions for the nonbank servicer amid regulators' concerns that the Atlanta-based firm was growing too quickly.

Cosgrove, who is also president and CEO of Union Home Mortgage, based in Strongsville, Ohio, cited "mounds of confusing, and at times conflicting, federal and state rules" as impediments to servicers' loss mitigation efforts. Specifically, he noted the seeming disconnect between Consumer Financial Protection Bureau mandates to ensure servicers exhaust all options prior to foreclosure, and Fannie Mae and Freddie Mac's compensatory fee structure that charges servicers penalties for exceeding default servicing timelines — a sentiment echoed by MBA President and CEO David Stevens in his remarks at the conference.

"[T]he high touch efforts to help some borrowers can put us at risk for violating compensatory fee deadlines, which will only add to our costs," Cosgrove said.

While servicing was traditionally a behind-the-scenes business, the mortgage crisis and recession brought it to the fore, making servicers "held to higher accountability than ever before," he added.

"[H]ow the consumer feels about the loan servicing process greatly impacts their perception of the entire real estate finance industry," Cosgrove said. "This profoundly influences policymakers in statehouses and Washington, as evidenced by the lengthy and detailed servicing regulations now in effect."

He also warned the Federal Housing Finance Agency may renew efforts to reduce the 25 basis point servicing fee. While Cosgrove said the MBA does not have details on the specifics of a potential change, he predicted reducing the fee would deter new innovation and chase away financial institutions and private capital from the servicing industry. Instead, "we should support policies that encourage further investment in state of the art consumer servicing platforms," he said.

"This could have adverse impacts to certain business models, particularly those that rely on the fee to compensate for the ever-growing cost of compliance," Cosgrove said. "Any considerations to change the fee structure must consider business impacts, new accounting rules, and actual costs of servicing under the new rules."

Still, regulators have shown a willingness to work with servicers, most notably in expanding eligibility for the small servicer exemption and other changes to the CFPB's new servicing standards.

"The bottom line is that regulators are willing to listen…The CFPB has the authority and is willing to make adjustments to the rules, as long as they are beneficial to consumers," Cosgrove said.

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