Servicing Matters

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. 

A more vexing question is why these differences across servicers exist, particularly with the existence of programs like the Home Affordable Modification Program (HAMP) that were designed to streamline and standardize the modification process.  Unfortunately, we can’t really answer this question with existing data.  We do examine differences between bank and non-bank servicers, to examine whether a servicer’s capital structure influences their practices.  Adam Levitin’s work (a regular contributor to this blog and the co-author of a terrific paper on mortgage servicing) gave us that idea. We find that non-bank servicers are more likely to offer modifications, especially principal reductions. But the bank/non-bank divide is unlikely to be the whole story, and we find that differences across bank and non-bank servicers have diminished over time.

What this suggests to us is that the Bureau of Consumer Financial Protection (CFPB) and other financial regulators at the federal and state levels need to be supported in their ongoing efforts to ensure greater transparency and accountability in mortgage servicing. For example, the CFPB recently implemented servicer rules which include improvements in borrower communication and disclosure, specific obligations to respond to borrower requests for information within specified timeframes, rules related to early intervention with delinquent borrowers and a single point of contact, and a prohibition on dual tracking. Future research should seek to assess whether these new rules reduce servicer heterogeneity and improve outcomes for delinquent borrowers.  Without better data on servicing practices and borrower outcomes (especially over the long-term), policy-makers are in the dark when it comes to designing effective foreclosure prevention strategies and ensuring that every borrower gets fair and equal treatment.

Comments

[Richard Davet]

Dear KT,

As a business man driven by "how stuff works" I have studied this "thing" since 1996.

I was surprised to learn in 1996 that Bank of America (BAC) was selling 94% of all mortgages written by the bank on a daily basis to FNMA alone. Upon sale, most of the mortgages sold to fnma also named BAC as "servicer". BAC was first the "lender", then changed hats to "servicer" under the mandates as signatory of the Guidelines of the "GSE Business Model" as written by fnma. The duties are explicitly outlined in the FNMA Guidelines. Strict adherence to these "Guidelines" were proffered to congress by the gses in exchange for the government guarantee of their mbss. Congress was assured by the gses that all of their partner/players were bound by their agreements which ensured a buyback at par if they any other player demanded payback.

The various roles of the "servicer" in the government sponsored "modifications" are merely an attempt to modify the GSE Guidelines. BAC as lender made commitments as mortgagee in the contract with the borrower to which BAC as "servicer" is actually a contractor responsible to FNMA-----not to the borrower. You have to refocus on the fact that you (borrower) are the mortgagor who has a contract with the mortgagee (FNMA) under the terms and conditions of your contract. In other words, let the gse worry about their contractors for which they are responsible.

[Richard Davet]

MSRs are part of a fatally flawed GSE Business Model.

"the American style of mortgage securitization is rife with conflicts where entities that originate, securitize and service mortgages are generally not the same as those that invest in mortgage securities. As a result, the incentives to originate sound mortgages and to service them well are inadequate. No wonder that the quality of mortgages degenerated so rapidly."
Soros-wsj-2008

Will MSRs on newly minted mortgages post 2012 be more attractive?---maybe. A more likely scenario would be the degradation in quality over time once things "quiet down".Then we can start repeating history again with this fatally flawed model.

[Allan]

The biggest problem with service providers is that consumers have no choice in the matter. A mortgage is a negotiable instrument. That is, the lender can do whatever it wants with the loan. But the loan is non-transferrable, so the borrower cannot sell the loan to another. My understanding is that this situation is due to rules set by the government.

We should change the rules. Borrowers should at least have a say of their service providers.

[Richard Davet]

The service provider is the contractor of the mortgagee who owes contractual duties to the mortgagor ( GSE Business Model).

If the service provider is errant, it is up to the mortgagee to get him/her back in line with the GSE Guidelines.

The contractual Guidelines were proffered to Congress as insurance against mischief by players in the Model that threaten the safety and soundness of the GSE MBSs. The mortgagee owes that duty to the mortgagor under the loan terms and conditions.