Mortgage servicing will never again just be a back office function of the home finance sector, the junior partner in the originations/servicing axis. From now, equal partner status seems assured, and there’s an outside chance servicing could become the lead partner in the process.
That means there are exciting times ahead for mortgage servicers as the sector starts to see light at the end of the tunnel of the foreclosure and default servicing crises. In another couple of years, the foreclosure glut will be over and the business will begin to see the dimensions of its new normal.
What’s happened in the last few years to give servicing headline supremacy over originations will shape this new way to be.
Servicers have been crucial in keeping the American mortgage market functional in the face of a devastating credit disaster. The cleanup has been achieved in the face of unprecedented circumstances and has given the niche new tools it can use to maintain a market somewhere near to equilibrium.
The most spectacular of these has been the birth of servicing underwriters. It used to be that underwriting (or lack of it) was found on the originations side. But as servicers began modifying staggering numbers of mortgages, they took control and implemented stringent underwriting practices that will serve as a model for all mortgage underwriting in the future.
There has been a merging at the edges of servicing and originations. Lots of those servicing pros doing the loan mods came from the originations side of the business, where their services were no longer needed. Homeownership counseling, which used to be the purview of originators before the mortgage closed, migrated into the servicing arena, where it was provided after loans defaulted.
It's been a rough road. The servicing sector clearly wasn’t ready for the avalanche of foreclosures. The robo-signing scandal was a black mark and probably served to delay even further a foreclosure process bogged down in legal delays (in judicial states) and a glut of procedures trying to get done all at the same time.
Challenges lie ahead. The Consumer Financial Protection Board in its wisdom has targeted servicing with nine tough rules that went into effect on Jan. 10 of this year. Basel III came up with some tough standards. Add in Dodd-Frank and you have a tough set of regulations to implement and comply with.
A central challenge will be following best practices for servicing nonconforming mortgages. There have been very few such loans these originated in the past few years, but their revival is the key to returning to a robust mortgage industry. And the challenge to servicers will be not to repeat the debacle that happened with nonconforming mortgages the last time around.
While the future of servicing will play out as it will, it’s certainly possible to contemplate a merging of the servicing and originations silo under one roof (or barn, if that’s the right metaphor). Certainly the technology now exists or can be developed that can make a seamless process all the way through, from lead generation through reconveyance.
Tech providers have responded well to new realities on the servicing side. Look at the short sale apps that sprang up as that microniche boomed. The tools to make any future that can be contemplated will be easily at hand.
Mark Fogarty, Editor at Large at National Mortgage News, is starting a regular blog of analysis and commentary based on his 30 years covering the mortgage industry. This post is adapted from his opening remarks to be given Wednesday at SourceMedia's Mortgage Servicing Conference in Dallas.