Many borrowers have experienced originating a loan with one of the big banks, only to find learn later down the line instead of the bank, a third party mortgage servicer handles administrative tasks associated with the account. Mortgage servicers carry out a variety of duties traditionally performed by mortgage originators, including collecting mortgage payments from homeowners, handling customer service issues, making loan modifications and initiating foreclosure proceedings.
According to Bloomberg News, mortgage serving represents a $10 trillion market. Recently, Bank of America agreed to sell Nationstar Mortgage Holdings Inc. $10.4 billion in residential mortgage servicing rights for mortgages guaranteed by government-sponsored- enterprises.
Largest Non-Bank Loan Servicer
The deal brings the size of Nationstar’s servicing agreements portfolio to more than $430 billion, which makes the firm the top non-bank mortgage servicer in the nation. Nationstar also manages administrative loan services for private investment funds, government agencies and other entities with securities and mortgage portfolios. The company earns revenue on the services it provides for unpaid loan balances.
Nationstar expects to close a $2.4 billion mortgage servicing deal with Residential Capital the bankrupt division of Ally Financial. By the fall, the mortgage servicer plans to complete a $63 billion acquisition of the mortgage servicing assets of Aurora Bank. In addition, Nationstar services government (FHA and VA) and conventional (Fannie Mae and Freddie Mac) loans it originates in the residential mortgage market.
Servicing Industry Facing More Pressure
According to Nationstar’s CEO Jay Bray, traditional servicers— in-house divisions or subsidiaries of big banks, have become overwhelmed with new regulatory oversight, capital requirements and customer-service. Banks want to reduce their “exposure” in the residential market including their servicing portfolios, said Bray. Bray estimates $1 trillion of mortgage servicing rights up for sale by banks.
Earlier this year, the Consumer Finance Protection Agency (CFPB), the federal watchdog agency responsible for educating and protecting U.S. consumers, released new rules for the mortgage servicing industry designed to change some questionable business practices highlighted during the robo-signing scandal in late 2010.
Changes mortgage servicers must implement include the following items:
- Present monthly mortgage statements in clear language.
- Provide disclosures or warnings of interest rate adjustment on adjustable-rate mortgages (ARM).
- Servicers must make “good-faith” effort to contact delinquent homeowners and offer options other than foreclosures.
- Promptly credit accounts after receiving payments.
- Develop policies and procedures to reduce mistakes, prevent lost documents, provide accurate information to borrowers and correct errors.
- Acknowledge receipt of correspondence informing the servicer of an error, conduct a review within a reasonable time and notify borrower of a final decision.
In addition, servicers would have to give borrowers who fail to maintain hazard insurance on their property a notice and pricing options before placing expensive “forced insurance” on the home.
Another important part of the CFPB’s initiative requires mortgage servicers to change the procedures for working with delinquent borrowers and homeowners in the foreclosure process. Mortgage servicers must assign a team who has the tools and solutions to help homeowners save their homes from foreclosure.
According to analyst Donald Fandetti, companies like Nationstar will benefit from the sour taste left in the mouths of mortgage lenders after the housing crisis. Banks look to rid themselves of capital intensive and unpredictable mortgage servicing divisions. Mesirow Financial Inc., chief economist Diane Swonk believes less stringent regulatory and capital requirements give small servicers a competitive edge.