Editorial: Ramifications

This year is shaping up to be a turning point for the mortgage industry, and servicers are going to play a key role in how the industry's image weathers the current storm.

There's plenty of blame to pass around in the wake of the subprime mortgage meltdown. Fortunately for portfolio managers, most of that blame belongs in the corner of speculative homebuyers, eager real estate agents, aggressive loan originators and other parties to the loan closing transaction. Unfortunately for servicers, the public image of the entire home loan industry has taken a beating amid reports that many homebuyers didn't understand the terms of their loans (especially payment-option ARMs and other loans that are poised to reset). The question of loan product "suitability" for borrowers is a key question being addressed by policymakers in the nation's capital as lawmakers and regulators seek ways to rein in rogue loan originators.

That may help keep portfolios clean of loan fraud in the future, but as usual servicers are the ones who have to clean up after the mess today. And there will continue to be plenty of pressure on them to aid troubled borrowers who face onerous rate resets and fall behind on their payments.

The subprime mess may have forced companies to clean up their underwriting and quality control operations, but there will always be borrowers and lenders that are trying to stretch their buying power in ways that increase loan default risk (witness the continuing availability of "credit repair" services).

As lenders start to release full-year 2007 results, it's clear that the drama isn't over. One analyst predicts that financial institutions still face between $59 billion and $149 billion of losses from mortgage portfolio holdings over the next several years (that's on top of the $94 billion of writedowns and credit losses already incurred). Most of the future hits will come not from asset writedowns, but from additional credit loss provisions against second mortgage, subprime and payment-option ARMs held in portfolio. The credit woes challenging the industry are far from over. But we believe that the shakeout of weak originators will benefit servicers in the long run. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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