The mortgage industry after the 2008 housing bubble burst has undergone a sea change. The financial crisis last decade didn’t just increase the number of delinquent borrowers, but also saw a series of new regulatory measures being imposed at both state and federal levels. The increased compliances and bolstered processes have led to sharp hike in loan servicing rate.
The cost to service a performing loan has increased from $59 per loan per year in 2008 to $156 in 2013. The non-performing cost to service has risen from $482 to $2,357 per loan per year over the same period according to a PWC study. While technological innovations were stated to be a solution to deter increasing costs, technological overhaul is yet to be seen.
One of the biggest challenges threatening the industry is the pervasiveness of legacy systems that reduce the effectiveness of the entire lending and servicing process. Coupled with it is the inertia of veteran loan officers and lending institutions who have grown comfortable with legacy systems and paper-based systems. They hesitate to do away with these systems in favor of newer, faster and agile mortgage technology solutions.
One significant change the mortgage landscape is witnessing is a reduction in concentration among the top servicers. With banking firms focusing on core banking, the market is seeing a shift to non-bank mortgage service providers to fill the gap created by regular financial institutions.
Mortgage servicing and its impact on consumers
Mortgage servicing in simple terms is how borrowers pay their mortgage loan payments to lender companies. The latter performs other services in connection with mortgages and mortgage-backed securities.
Consumers are directly impacted by the servicer’s ability to process their payments properly and manage their loans effectively. Consumers are also affected indirectly through servicing cost trends which affect upfront loan pricing and rate-setting.
Earning revenues in a volatile market
In the mortgage servicing industry, revenues include servicing fees net of guarantee fees, ancillary fees, and float earnings from holding Principal & Interest (P&I) and Taxes & Insurance. Expenses include the direct cost-to-service, unreimbursed foreclosure and property expenses, allocated overhead, and the cost of funds (interest expense) for servicing advances. With the implementation of additional regulations, the cost component has been on the rise. The Housing Finance Policy Center also conducted a study which found that the overall cost-to-service for performing and non-performing loans have increased by 264% and 489% respectively since 2008.
Another important issue that crops up for MSRs is volatility. To maintain profitability, lenders leverage origination capabilities. That is when rates decline and MSRs lose value, lenders acquire and recapture loans through increased purchase.
Today, non-banking institutions have become major players in the market. Their presence in the servicing market has enabled MSR-buyers to balance the shifts in demand. This has consequently helped to support the volatile demand driven from several refinance markets. A growth in the trend is expected to naturally ease out the liabilities and burdens on the US finance industry. It is important to regulate, but democratically. With smaller players entering the market, one may be optimistic about the future. But again, it is more important to encourage the trend.
US policy regulations have been in much debate, and they are at least being critically evaluated from time to time by experts of various schools of economics. Growing trends tend to reveal their effects and nature more clearly in the future. But ongoing discussions tend to stem from principles of freer markets. Growth trends as a result, have to emerge from new incentives in the markets.
Preethi vagadia is a business architect worked in Finance and mortgage software solutions department with top notch companies and has over 8 years of experience in Mortgage Lending Technology, mortgage servicing software management etc. She has also worked in several process improvement projects involving multi-national teams for global customers in warranty management and mortgage