Dollar Total Of Servicing Is in Decline

A funny thing happened on our way out of the housing bubble: with home prices crashing in several once-red-hot housing markets, it appears that Americans now owe less on their homes than they did last year.

Of course, this could be a short-term hiccup on the road to higher servicing balances in the years ahead, but for the first time since National Mortgage News began tracking servicing balances a decade ago, mortgage debt fell on a sequential basis: $9.8 trillion at March 31, compared to $10.1 trillion at yearend.

Overall, the lower balance owed shouldn't come as a total surprise. Millions of homes have entered foreclosure the past two years. When servicers finally take title and place the house back on the market, the "new" sales price will be lower-in come cases much lower-than the old price. What this effectively does is reduce not only the outstanding mortgage bill for the nation, but it lowers the base of receivables that mortgage bankers can earn servicing fees on.

"The numbers are definitely declining," said Jay Brinkmann, chief economist for the Mortgage Bankers Association. The trade group tracks mortgage debt differently than this newspaper, but its findings are similar: consumers have reduced their residential debt load.

Brinkmann is quick to point out that the last $2 trillion increase in mortgage debt (that is, servicing rights) was achieved in just two years time. "Before that, it took three years to grow it by $2 trillion, before that, fours years, before that, 10 years, before that 37 years."

It's no secret why mortgage debt grew so rapidly this past decade. Cash-out refinancings allowed consumers to use their home equity like an ATM machine, withdrawing money based on what later proved to be inflated values.

But it's not only lower values driving down servicing balances-apparently more Americans (those with readily available cash, that is) are choosing to pay down their mortgages at an accelerated pace.

"There's a lack of good investments out there," said the Mortgage Bankers Association economist.

"Where are you going to put your money? If you put it in T-bills you'll only earn pennies. Stocks? No, it's better to pay down the loan."

All this talk of a lower debt load appears to be a positive for the personal balance sheets of Americans, but for residential servicers that earn their keep processing millions of mortgages each month, it's a dicey proposition.

The typical Fannie Mae or Freddie Mac loan pays an average servicing fee of 23 basis points. Mortgages that go into Government National Mortgage Association MBS carry a 44 basis point servicing fee. If a servicer's receivables fall so, too, will its net income.

"I think this trend will continue for five or six more quarters," said one mortgage insurance executive who's been in the business for 20 years. The executive, who didn't want his name published, conceded that lower mortgage balances also can translate into weaker mortgage insurance revenue. But slower home equity growth also means LTVs will not fall much and consumers will be unable to cancel their MI policies.

Falling mortgage debt is probably the chief reason some of the nation's top servicers saw declines in their servicing portfolios during the first quarter.

According to figures compiled by National Mortgage News and the Quarterly Data Report, seven of the nation's top 20 ranked mortgage servicers experienced a decline in receivables compared to the same quarter a year ago.

The nation's top two ranked mortgage servicers-Bank of America and Wells Fargo, which have a combined market share just shy of 40%-had what is best described as anemic growth of 2% each.

In the first quarter of 2008, right before the housing bubble burst, B of A grew its servicing portfolio 22%.

Similarly, Wells' servicing growth was a modest 8%.

And in that quarter, just two servicers among the top 20 had neagative growth. The rest had gains.

It's assumed that the steepest declines in home values are behind us which means most "mega" servicers aren't all that worried about the anemic growth numbers on loan balances.

Gordon Albrecht, executive vice president of specialty servicer FCI Lender Services, Anaheim Hills, Calif., believes when it comes to home values "the worst of the damage is already done. What lies ahead won't be so bad."

The mortgage servicing industry is hoping he's right.