Motley: Servicers Must Plan Now for Rough Waters

DALLAS–After years of turbulence, the mortgage servicing industry finds itself in relatively stable condition. Mortgage Bankers Association J. David Motley, CMB, says now is the time for servicers to plan for the next rough period.

“Now is a great time to be in the servicing business–when we can enter the waters during relative calmness and plan ahead for the rough waters that will inevitably come,” Motley said here at the MBA National Mortgage Servicing Conference & Expo. “Your team is strategically placed for optimum results. Knowing what lies ahead, having a plan for the future is key to success.”

Motley, president of Colonial Savings FA, Fort Worth, Texas, noted the mortgage servicing industry has undergone significant changes in the past decade.

“Some changes have created rocky and treacherous waters with new, sometimes convoluted, regulatory standards at both state and federal levels,” Motley said. “Yet at the same time, regulators, investors, and consumers have raised their expectations of us for better service levels. Market share has not only diffused, but there has also been a shift away from commercial banks and thrifts to non-banks.”

Motley said the new Administration in Washington creates an opportunity for the real estate finance industry to work with a more fiscally conservative, limited government and less regulation-minded administration.

“For some, this may be a good time to reexamine opportunities for entering or retaining your servicing business,” Motley said. “And from an industry perspective, now is the perfect time to examine the servicing market, fix regulatory barriers and preserve the liquidity and value of mortgage servicing rights.”

Motley said with “bumpy waters” ahead, the industry must work with Washington to achieve regulatory clarity in servicing rules as well as resolve the Consumer Financial Protection Bureau’s broad authority of enforcement actions.

“This issue is broader than the servicing industry, but there are specifics we must tackle,” Motley said. “MBA fought for and achieved the national servicing standards so that everyone was operating on the same playing field. That’s the good news. Unfortunately we still have to achieve clarity on many of the rules.”

The most significant threat to the servicing industry, Motley said, is the Basel III treatment of mortgage servicing rights, noting the rule increases risk-weighting of MSRs held by banks and also significantly decreases the cap on MSRs that a bank may hold on its balance sheet.

“Due significantly to the new Basel rules, many banks have sold MSR assets at a record pace,” Motley said. “In this process, some banks are losing one of their two primary relationships with retail customers; a safe and sound earning asset; and a natural hedge to the loan production side of the business. The punitive capital treatment reduces demand for MSRs, creating a less liquid market that could result in lower prices for mortgages sold in the secondary market, and higher rates for consumers. This seems so obvious to me–what about this do the regulators not understand?”

Motley also noted the CFPB’s rulemaking through enforcement strategy impacts every aspect of the real estate finance industry, including servicers. “The entire industry is vulnerable to punishment of activities not previously believed to be prohibited,” he said. “Every week we witness enforcement actions in which the punishment doesn’t fit the crime. It is unduly costly, reduces competition, and impacts the availability of services for consumers. Enforcement-first activities cause debilitating uncertainty about what is and what is not permissible.”

Motley also expressed disdain for the Department of Justice’s “overly broad” use of the False Claims Act in punishing lenders and servicers for FHA rules infractions.

“Without clarity in this area, we’re again up a creek without a paddle,” Motley said. “Every consumer is entitled to quality customer service, timely communication, and a fair loss mitigation if they fall behind on their mortgage payments. But the complexity of the rules and resulting increased costs of compliance discourage service.”

Motley noted the cost to service a performing loan has increased from $60 per loan per year in 2008 to nearly $160 per loan per year in 2013, while the cost to service a non-performing loan has risen from nearly $500 to nearly $2,300 per loan per year.

“While some servicers have attempted to mitigate these cost-to-service increases through technological innovation, many remain challenged by legacy platforms that require time-consuming and costly changes to accommodate the latest requirements and servicing standards–which can then change again,” Motley said. “Harmonizing FHA, CFPB and GSE regulatory requirements would provide more clarity to servicers and afford borrowers better loss mitigation opportunities.”

For example, Motley noted servicers of FHA insured mortgages are required to follow FHA servicing policies and timelines, which are not aligned with Fannie Mae/Freddie Mac timelines. FHA also has three distinct milestones which can punish servicers that start the process slowly but are able to “catch up.” Further, FHA’s timeline requirement is a 20-year-old policy.

“And importantly, FHA’s zero-tolerance for possible delays in the loss mitigation protocol is contrary to the spirit of CFPB rules that encourage multiple contacts and appeal rights for borrowers,” Motley said. :We need two things: First, FHA needs to adopt a single unified timeline that mirrors the GSEs’ timeline, and consumers need greater opportunities for loss mitigation. FHA should also follow the GSE’s direct conveyance approach which will both reduce costs for FHA servicers and allow foreclosed properties to be purchased by new owners who want to become part of the community.”

Second, Motley said national servicing standards need to be aligned with state standards. “The CFPB has created comprehensive national servicing rules that all servicers must follow,” he said. “Duplicative or overlapping state standards only add costs to the process with little benefits to the system. Fragmented state regulation based on business model also has the potential to distort the market and–eventually–reduce consumer choice and access to credit.”

MBA is working with the Conference of State Bank Supervisors to create continuity and a unified “non-bank” framework for all states. “Our goal is to achieve efficiencies and alleviate the costs introduced by duplication or fragmentation to benefit consumers as well as servicers,” Motley said “Working with our partner, CSBS helps navigate these waters, but we still have some complex maneuvering left to do.”

Looking ahead, Motley said regulators, legislators, consumers advocates, industry leaders must work together to make servicing a more attractive business model. “We need a strong servicing market that works for all market stakeholders and participants,” he said.

Additionally, Motley said the industry needs innovation. “We want and need to provide greater, more efficient and technologically advanced services to borrowers,” he said. “For example, let’s provide the borrower with more ‘self-serve’ payment options. Electronic statements afford servicers the opportunity to connect with borrowers regularly and more efficiently. So, let’s reduce regulatory, litigation and cost burdens to free up expenditures and allow us to innovate our services.”

Now is also a great time to look at the current environment at Ginnie Mae,” Motley said.

“Ginnie Mae has a more diverse issuer base which is good for overall risk management, and ensuring that veterans, first-time homebuyers and low to moderate income Americans can continue to get home loans,” Motley said. However, the return of independents means that Ginnie Mae has to evaluate different business models that may require more resources and tools for counterparty risk management. MBA will work with Ginnie Mae to help develop tools they can use to assist with the evaluation of their counterparties.”

Motley said mortgage servicers have an “excellent opportunity” to chart their course and plan for their future. “But this time, we will be much better prepared,” he said. “MBA has a seat at the table in Washington, from which we can see with a broader view those opportunities to better represent the case for our members,” he said. “When administration officials and new Congressional leadership are looking for institutional knowledge, a better understanding of the market, or the view from the industry, they call MBA. MBA impacts legislation and regulation so that we are able to operate at our full potential. The power to stay united in the coming year is in our collective hands. Only by coming together can we achieve the best results for our industry.”