Smaller U.S. residential mortgage servicers will be challenged by the increased costs of new servicing requirements as they seek to opportunistically grow through strategic acquisitions, according to Fitch Ratings. The new requirements, issued by the Consumer Financial Protection Bureau (CFPB), go into effect this Friday, Jan. 10.
Many U.S. residential mortgage servicers have been working diligently to meet new the servicing requirements. They include important changes to how servicers handle borrower notifications and interaction, and key procedure and infrastructure improvements. While these changes are expected to be impactful in 2014, many large servicers have already made significant progress towards meeting the January 10, 2014 deadline, in particular those servicers subject to mortgage servicing consent orders issued previously by government regulators. Where the potential problem lies, however, is with smaller independent/non-bank servicers.
This comes as 2013 saw a notable amount of mortgage servicing rights transferred due to servicer consolidation and acquisitions. Larger servicers, and in particular commercial bank-held servicers, have been active in off-loading the servicing rights on underperforming loans, which are difficult and expensive to manage effectively within regulatory guidelines. A number of servicers, including those offering specialty servicing, have actively sought out such opportunities. This in turn has contributed to a loan servicing acquisition market that has grown increasingly competitive. The dynamics of servicing acquisition and transfer activity is subject to continued transition as these smaller servicers struggle with the requirements and costs of the new servicing guidelines.
Fitch recognizes that many independent/non-bank servicers have significant management expertise and have benefited notably from the use of modern servicing technology. However, compliance with the new rules will mean more recordkeeping and infrastructure improvements, and thus higher costs. The cost of compliance with the new guidelines has likely raised the minimum number of loans that a company has to service in order to remain profitable; i.e. to spread the increased cost over more loans.
If properly managed, the required changes can be implemented without major challenges. However, the change place higher fixed costs on servicer operations. Since larger servicers may more easily absorb higher fixed costs, smaller servicers may struggle as they seek to balance the cost of regulatory rule compliance with the need to maintain or grow their servicing portfolios, address their competitive position for new acquisitions, and manage their overall profitability.
Mortgage servicing is a cost-control and cost-competitive business function, and the new CFPB regulatory requirements will likely pressure this further. It is also expected that this environment will cause further pressure for consolidation in the servicing industry. Fitch will continue to monitor the effectiveness of individual servicers as they seek to incorporate the important guidelines of the CFPB and other regulatory requirements into their business practice.