BLOG VIEW: It is time to turn the page on the mistakes of the past and focus on building a housing sector that provides a path to secure homeownership for responsible borrowers. In the State of the Union, President Obama noted that we are in the lingering shadow of the housing crisis. One area that we need to shine a bright light on is mortgage servicing.
Efforts to restore and ‘professionalize’ mortgage servicing are struggling. It is equally troubling that recent legal actions by certain regulators and investors in mortgage-backed securities may undermine reasonable efforts by non-bank servicers to modify loans. It is time that we establish a servicing framework that is best for homeowners. To do that, servicers need to comply with new servicing standards to sustain the American Dream and ensure the integrity of mortgage securities. Public and private-sector leaders must embrace the need for industry regulation and best practices coupled with appropriate guidance, enforcement and accountability.
The time has come for the federal government, state governments, industry and nonprofits to work together to develop and implement transparent, consistent standards that promote responsible servicing and restores trust to our markets. Housing counseling should be tapped as a resource for borrowers who need assistance. Housing counselors could provide further support the industry by serving in an ombudsman role.
Mortgage loan servicing was one of the critical processes that failed during 2008 housing crisis. It went from being a relatively straightforward process – overseeing the cashiering of payments, tracking principal and interest – to a complex, highly regulated operation with an appropriate focus on sustaining homeownership, collection activities and consumer protection.
An effort to improve servicing coupled by the desire of pre-Dodd Frank mortgage investors and servicers to mitigate risk and respond to Basel II fueled the growth of the non-bank servicing industry. These servicers emerged to handle ‘legacy’ and higher risk pre-Dodd Frank portfolios while providing consumers and distressed homeowners with high touch interactions. According to a recent Urban Institute report, non-bank servicers hold $1.4 trillion in servicing rights out of a nearly $10 trillion market.
While commercial banks remain the dominant owners of mortgage servicing rights, non-bank servicers play an emerging and critical role in the market. With nearly 17% of the market share, the housing market cannot recover fully without them. They are too big and too essential to fail. Alternatively, if they fail, it would have a profound impact on our economic recovery, housing finance markets – and in the worst-case scenario, necessitate market intervention by the U.S. Department of Treasury. One only needs to examine the current plunge in non-bank servicer share value to contemplate this risk to our financial system.
Most importantly, homeowners and our nation's communities would be adversely impacted. Families still need to have their servicer handle their payments.Â If non-bank servicers do not exist – or lose their licenses – who would service these loans? There is little to no market interest in servicing these portfolios. Many large banks off-loaded much of their non-performing loans and do not want to re-acquire those loans. Others do not have an interest or the infrastructure to handle those loans as demonstrated by recent state enforcement actions.
Even if there were alternatives to non-bank firms, servicing transfers would create havoc in the system. Critical homeowner information does not always transfer cleanly. The process can be confusing to homeowners – it is rife with potential for error. Issues often arise with perceived inaccurate payment history, lost documents, broken processes and disruptions with the overall communication with the servicer and sub-servicer leading to frustration which often times leads to a negative outcome.
It is time to create a flourishing housing market that is vibrant and performs optimally for consumers, investors, lenders and shareholders.
David Berenbaum is CEO of The Homeownership Preservation Foundation, a nonprofit group that helps financially challenged homeowners navigate their budget problems and, whenever possible, avoid mortgage foreclosure – free of charge.
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