January 2016 - Out of the Woods

TheMReport — News and strategies for the evolving mortgage marketplace.

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50 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SERVICING THE LATEST Regulatory Oversight Alters Servicing Industry Non-performing loans increase in cost, while MSAs see big changes. H eightened regulatory and counterparty oversight, the rising cost of holding mortgage servicing rights as an asset, and post-crisis changes to servicing practices that have substantially increased the cost of servicing a loan are three factors driving changes in the mortgage servicing industry since the housing crisis, according to Freddie Mac's November 2015 Insight & Outlook report. According to Freddie Mac, in the five year-period between 2008 and 2013, the cost of servic - ing a performing loan increased 2.6 times (from $59 to $156) while the cost of servicing a non- performing loan spiked by 4.9 times (from $482 to $2,357) during the same period. The cost to service a non-performing loan exceeds the servicer's compensa- tion; prior to the crisis, per-loan losses on non-performing loans didn't threaten the servicing organization's overall profit- ability, because non-performing loans represented a small enough share of the servicer's portfolio. This changed due to the massive surge in non-performing loans as a result of the crisis, making the share of non-performing loans in servicers' portfolios significantly higher. The increased cost per year jumped by nearly 5 percent to service non-performing loans, and the increase in regulatory oversight has increased the cost of servicing all loans. Some servicers are also factor - ing in a mental "reserve" due to regulatory uncertainty and the increased concern over servicers' potential liability for mistakes; these mental reserves are ex - pected to diminish as servicers gain more certainty about the regulatory environment, accord- ing to Freddie Mac. "Prior to the housing crisis and Great Recession, mortgage servicing had followed a decades- long trend of consolidation," Freddie Mac Chief Economist Sean Becketti said. "In 2001, the top five servicers handled 37 percent of all servicing. By 2009, the market share of the top five had grown to 59 percent. But during the recession, this trend reversed, and by the second quarter of 2015, the share of the top five servicers shrank to 40 percent. In many ways, today's market resembles the 1980s, where smaller servicers and non-bank servicers held a higher share before the industry started to consolidate. Housing finance is still evolving, and mortgage servicing is likely to continue to change along with it. It's too soon to say if recent trends will persist or be reversed." Increased regulatory oversight since the crisis includes the addi - tion of the Consumer Financial Protection Bureau in July 2011 and the CFPB's subsequent heightened servicing standards that became effective in January 2014. The GSEs and the FHA have always had scorecards to gauge performances of servicers, but those scorecards have been refined in the last few years due to the experiences of the housing crisis. Also in recent years, the capital cost of holding an MSA (mortgage servicing asset) has increased. The estimated value of the MSA has historically counted toward a bank's regulatory capital, but In many ways, today's market resembles the 1980s, where smaller servicers and non- bank servicers held a higher share before the industry started to consolidate.

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