Is 'Too Big To Fail' Servicers An Idea Whose Time Has Come?

By now, most readers are familiar with "too big to fail," a regulatory concept that reminds me of that George Carlin joke that goes something like this: "Is God so big and powerful that he can create a rock so heavy that he himself can't lift it?"

I'm sure I've mangled the line, but you get the gist. Big and powerful can be good, but big and powerful can also be extremely dangerous. Do I need to rehash the events of the past two years again?

I recall 20 some odd years ago during the administration of George H.W. Bush when then Treasury secretary Nicholas Brady (a former Wall Street honcho) gathered the Beltway media for a little chat about worldwide mega-banks and how the U.S. had so few among the top 20 institutions. The message was clear: big is better and how is it that we (the U.S.) had so few depositories in the club?

Back then Japanese banks dominated that club and we all know what wonderful shape Japan Inc. is in these days. It's ugly out there and our elected officials and certain regulators (Tim Geithner over at Treasury and Sheila Bair at FDIC) have hopped on the "We need to end the TBTF band wagon." It's too bad it doesn't feel like we're ever going to get there.

Talk is cheap currency. In Washington tongues continue to wag about how to fix our nation's financial mess and "reregulate" depositories, Wall Street firms and insurance companies (those that wrote credit default swap contracts) to make certain the $2 trillion debacle we're going through never happens again. But I have yet to hear one word about capping a bank or nonbank's ability to amass mortgage servicing rights.

I fear that our elected leaders in Congress don't even know what the heck servicing rights are. And I'm afraid they don't realize that together Bank of America and Wells Fargo continue to control (service) roughly 40% of the $9.9 trillion of home mortgages that are outstanding today.

Or maybe they do understand and think it's OK - or maybe they think there's nothing wrong with it, at least for now because the housing and mortgage industries are in such turmoil that monkeying with putting limits on servicing shares isn't the right thing to do at this time. But I do recall it wasn't too long ago that Bank of America looked like it was going down for the count. (Never say never.)

If BoA had failed, the monthly processing of $2.15 trillion of home mortgages (22% of all residential loans according to figures compiled by this publication) could've been thrown into turmoil. I'm not saying that the FDIC as its conservator would've ceased passing on the principal, interest and taxes to the proper third parties, but trouble would have reared its head in one fashion or another. Fannie Mae and Freddie Mac, for example (which are examples of TBTFs themselves), could have contractually pulled all their servicing away from BoA and placed it with ... actually, I'm not sure where they would've placed it. With Wells or Chase? Maybe. But take a look at the fourth and fifth largest servicers - Citigroup and Residential Capital Corp., two firms that aren't exactly the picture of financial health.

And therein lies one of the problems of TBTF: it creates an industry that offers no choices to consumers - and one that also leaves regulators with few options when disaster strikes. In years past I've written columns and news stories about "deconsolidation" where some of the top-ranked firms appear to be losing market share. But those trends have always been short lived.

Paul Muolo is executive editor of both National Mortgage News and Mortgage Servicing News. He can be e-mailed at Paul.Muolo@SourceMedia.com.

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