The Role of Mortgage Servicers in the Subprime Mortgage CrisisBreck Robinson
University of Delaware
0%
10%
20%
30%
40%
50%
60%
70%
80%
1989 1994 2000 2004 2007
Top 25
Top 5
Source: Inside Mortgage Finance
Mortgage Servicer Market Concentration
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
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
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 paymentsCurrent environment may be expensive
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
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
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
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
Subprime Mortgages Originated with Second Loans
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2002 2003 2004 2005 2006 2007
Variable rate (2/28)
Fixed rate