I am so pleased to offer the following post by Carolina Reid, a premier housing researcher at UC Berkeley, about her excellent study of how mortgage servicers matter in creating home-saving opportunities. Welcome Carolina to Credit Slips.
By now we’re all familiar with a plethora of Wall Street financial acronyms, from ABSs to CDOs and CDSs. But what about MSRs (mortgage servicing rights)? Until a year ago, I had never heard of MSRs, so I was surprised to find out that the rights to collect my mortgage payment are traded on Wall Street, much in the same way mortgage backed securities are traded. And, as a borrower, I have very little control over who purchases the servicing rights to my mortgage, despite the fact that it is usually the servicer who decides whether to offer a loan modification or start the foreclosure process if I become delinquent. Borrowers can’t “shop around” for the best servicer – you get who you get (but maybe you should get upset).
Does it really matter who services your loan? To date, research has very little to say about this, though ask any housing counselor who has tried to shepherd a distressed loan through the modification process and the answer will be “most definitely.” Unfortunately, most data on loan performance don’t allow researchers to identify the institution that services the loan, which makes analysis of servicer performance challenging. So other than headlines about robo-signing or dual tracking, we have few studies that systematically study servicers and the ways in which they assist distressed borrowers.
My colleagues, Carly Urban and J. Michael Collins, and I recently released a Fisher Center Working Paper that explores differences in servicer behavior, to shed some light on the servicing industry. Using a unique dataset on subprime loans that were at least 60 days delinquent, we examined the modification practices of 20 large, national servicing institutions. We wanted to know whether servicers differed in the likelihood of offering modifications with interest rate or principal reductions, even for similar borrowers living in the same neighborhood. And we wanted to know whether some servicers did a better job of helping borrowers retain their homes, all other things being equal.
What we found is that servicers differ dramatically in their loan modification practices and their loan cure rates. Servicers with higher cure rates performed permanent modifications on almost 48 percent of their delinquent loans, while servicers with the lowest cure rates only granted modifications to 2 percent of delinquent borrowers. Some servicers favored interest rate reductions; others were more willing to offer borrowers principal write-downs, or even offer a second modification. These differences in servicer practices led to very different cure and re-default rates for distressed borrowers, even after controlling for a wide range of borrower, loan, and housing market characteristics. Who your servicer is really does matter. We also examined whether there were differences across servicers for Black, Hispanic, Asian and white borrowers. In general, we did not find any substantive race or ethnicity effects within any one servicer, rather, the differences across servicers remained constant. In other words, if you end up with a servicer unwilling to do modifications, you’re not getting a modification regardless of your race.