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The Role of Mortgage Servicers in the Subprime Mortgage Crisis

The Role of Mortgage Servicers in the Subprime Mortgage Crisis. Breck Robinson University of Delaware. Mortgage Servicer Market Concentration. Source: Inside Mortgage Finance. The Role of Mortgage Servicers. Bill and collect payments and fees from mortgage holders

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The Role of Mortgage Servicers in the Subprime Mortgage Crisis

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  1. The Role of Mortgage Servicers in the Subprime Mortgage Crisis Breck Robinson University of Delaware

  2. Mortgage Servicer Market Concentration Source: Inside Mortgage Finance

  3. The Role of Mortgage Servicers • Bill and collect payments and fees from mortgage holders • Monitor non-discretionary payments (e.g. taxes, insurance) • Manage delinquencies to minimize losses and maximize asset recoveries, acting as the agent of the trustee • Manage mortgage insurance recoveries, if applicable • Advances on delinquent loans • Remit payments to trustee • Provide required information to trustees/investors regarding the performance of asset pools

  4. Sources of Revenue • Annual fee based on the $ amount of mortgages serviced • Fixed-rate prime loans = 25 basis points • Prime ARMs = 37.5 basis points • GSE sponsored mortgage pools = 44 basis points • Subprime loans = 50 basis points • Fees structure of the following: • Type of mortgage product • Typical loan size • Reporting requirements • Resource commitment • Float • Other Fees • Can be a significant source of revenue

  5. Sources of Costs • Labor • Loss mitigation • Costs not associated with foreclosure may not be reimbursed • $600 to $1,000 to modify loans • Advancing delinquent payments • Financing costs on delinquent payments • Current environment may be expensive

  6. Types of Loss Mitigation • Maturity extension: • May increase the maturity of the mortgage by up to 10 years. • Deferring or forgiving missed payments: • Missed payments can be rolled into the principal portion of the loan and the monthly mortgage payment can be adjusted to reflect the larger principal amount • Or • Missed payments can be treated as a separate monthly payment that must be repaid in addition to the original monthly mortgage payment • Time period for repayment is over a shorter period of time. • Principal reduction: • Reduction of the actual loan amount to be repaid by the borrower. • Interest rate freeze or reduction

  7. Types of Loss Mitigation • Short sale: • Allows the lender to reduce the amount the borrower owes on the home so that the borrower can sell the home without taking a significant loss • Short refinance: • Lender is willing to take a loss on the loan by reducing the outstanding balance of the loan in order to help the borrower refinance with a new lender • Deed in lieu of foreclosure: • Lender may be willing to accept the deed to the home and bypass the foreclosure process, if exchange the borrower would be released from all obligations under the mortgage • Cash-for-keys negotiation

  8. Why is it difficult to modify mortgages? • Compensation structure for servicers • Revenue is a percentage of assets serviced • 25 to 50 basis points + fees collected from borrower • Ex: late fees • Foreclosure may maximize the discounted value of the cash flows for investors • It has been estimated that 40% to 60% of modified mortgages will eventual default • Investor may be worse off after a loan is modified

  9. Why is it difficult to modify mortgages? • Expenses are mainly labor • Modifications are very labor intensive and costs may not be reimbursed in full • PSAs may restrict the ability of servicers to modify mortgages • At best, PSAs provide little guidance in how to modify mortgages • Potential litigation risk • Lenders that have the second loan on the property have no incentive to accept a loan modification

  10. Subprime Mortgages Originated with Second Loans

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