Although a larger number of mortgage servicers results in some that present more risk, that is offset by the benefits of diversification.
Private-label mortgages have become a smaller share of the largest mortgage servicers’ portfolios over the past several years.
As a result, more small and medium-sized nonbank servicers and sub-servicers have wrestled away market share from the bigger players.
Those were among the findings discussed in Benefits of Servicer Diversification Offset Risks in Changing Servicer Landscape from Moody’s Investors Service.
The shift has introduced or heightened
certain risks since some of the smaller non-bank servicers with less access to financial resources are not as stable as those with financially strong parents like banks.
Risk for smaller companies is exacerbated during periods of market volatility.
But the increased risk is offset by the benefits of servicers diversification.
For one thing, residential mortgage-backed securities concentration is reduced. Less concentration means that fewer transactions will be affected by the failure of any one servicer and a resulting servicing transfer.
“The failure of a large servicer, as opposed to a smaller one, is more likely to result in transfers to multiple entities, increasing the risks associated with merging servicing systems, coordinating onboarding processes, and reconciling accounts,” the report said. “Risks inherent in servicing transfers, such as data importation errors, grow along with the size of the transferred portfolio. Missing documents or incorrect data can cause payments to be misapplied or delay the foreclosure and liquidation of properties behind defaulted loans.”
Also, loans are no longer included in large portfolios that make them more susceptible to regulatory risks and lawsuits. The ratings agency cited Ocwen Financial Corp. and Ditech Financial LLC, which each have faced regulatory scrutiny and had servicing portfolios in excess of $200 billion.
Another factor is that small non-bank servicers are able to more quickly facilitate compliance with regulatory changes because they
tend to incorporate proprietary modifications into their servicing systems. But large banks don’t typically customize off-the-shelf loan servicing platforms.
Moody’s noted that regulatory actions can weaken servicers’ financial profiles because of fines and forced process changes that can increase compliance costs.
In addition,
more nimble servicers entering the fray are better suited to service defaulted RMBS loans. Many specialize in defaulted loans, have lower average loans serviced per employee and can more effectively mitigate losses on defaulted loans than their larger counterparts.
Also benefiting smaller operations are domestic employees versus the less-experienced offshore employees utilized by larger institutions.
Moody’s additionally highlighted the better use of technology to communicate with borrowers at smaller firms.
“They are more likely to use systems that increase ‘right party’ contact rates, have more borrower-friendly websites, and use innovative contact methods such as social media, secure texting and web chat to increase their interaction with borrowers,” Moody’s stated.
