Origination Activity to Fuel Nonbank Servicing Growth: Fitch
While nonbank servicers are expected to continue to gain greater market share in 2017, much of that growth will come from their own loan origination activity rather than mortgage servicing rights purchases and subservicing, according to a report from Fitch Ratings.
Nonbank servicers have grown their market share from 4% to 32% between 2008 and 2015 through MSR and subservicing deals, but those channels are drying up, Fitch reported based on a servicer roundtable it conducted in November. That growth is expected to continue, according to 89% of the roundtable's participants, but likely won't come from the same sources.
"Whereas MSR sales and subservicing had in the past driven servicing growth among non-banks, future activity will be driven by new loan origination activity by competitive non-banks who also service loans," Fitch managing director Roelof Slump said in a news release. "Servicing sales from banks who want to reduce the associated regulatory impact on capital will also drive growth."
Banks are looking to reduce the Basel III impact on capital, and servicing sales are one means to that end. Additionally, nonbank originators are increasing their loan production – and many of them are servicing their loans in-house.
But the source of nonbank's servicing isn't the only change coming to the industry. Servicers also have come to recognize the need to shift focus toward performing loans in 2017, a reflection of the positive impact that regulation has had.
Roughly 89% of Fitch's roundtable participants said that regulation improved servicing quality. In particular, they noted that servicing transfers are now cleaner because regulators require better data surrounding loan modification and loss mitigation activity already undertaken.
Even though the new presidential administration's stance on regulation is somewhat uncertain, servicers have accepted that "high regulatory scrutiny…is the new norm," Fitch analysts wrote. With more loans staying out of default, special and default servicers are looking to transition into the performing loan space to boost profits, but they said that will require upgrades to their websites and interactive voice response systems given consumer expectations.
Less than half of the roundtable's participant said they were satisfied with their core servicing systems, suggesting a need for improvement in servicing technology. And many expressed the need to use "wrap-around technology" to meet regulatory requirements and maintain business growth.
Despite this dissatisfaction, 86% of participants predicted that technology expenditures would increase as a percentage of their overall budget in 2017.
"New servicing technology development has not kept pace with the evolving needs of the industry," the Fitch analysts wrote. "Despite significant need and elevated costs caused by increased usage of wraparound systems, technology providers have not sufficiently introduced new solutions to solve current problems…Importantly, servicers believe that new technology can lead to improved performance."
Another area that servicers suggested needed further development was deal agents' involvement in residential mortgage-backed securities transactions. Roughly 86% of participants said the proposed Structured Finance Industry Group's DA construct created reporting challenges for servicers.
"Servicers believe that DAs can perform an important function by communicating directly with investors," the analysts wrote. "However, among Roundtable participants, uncertainty remains with regard to the incremental value of DAs performing servicer oversight."
In particular, servicers expressed concern as to how third-party oversight over portions of their portfolios could lead to operational challenges, including redundancies and overlapping responsibilities, which could drive up costs.