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The Federal Housing Finance Agency is close to issuing refinements to the government-sponsored enterprises' representation and warranty framework that will limit lender liability on buybacks of legacy loans.
October 20
WASHINGTON The cost of servicing nonperforming mortgage loans has skyrocketed since 2008 and it is making lenders skittish of borrowers with any chance of defaulting, according to a recent report.
The report, written by Laurie Goodman, director of the Urban Institute's Housing Finance Policy Center, found that the annual cost of servicing a nonperforming loan is $2,357, up from $482 in 2008 and 15 times higher than a performing loan.
While the report notes that put-backs and litigation risk are widely recognized as factors that have contributed to tight credit conditions, it says servicing costs are largely overlooked.
"In order to broaden access to credit, servicing issues are important and must be addressed," Goodman wrote in the report, which was issued late last month. "It's time to give them as much attention as we've given reps and warrants."
Goodman, a former senior managing director at Amherst Securities Group, found that the annual cost of servicing performing loans has increased 264% since 2008 to $156 in 2013. But the annual cost of servicing nonperforming loans has increased 489% during that time, based on Mortgage Bankers Association data.
Servicers will charge higher-risk borrowers a little bit higher rates to cover some of the default risk, but have become more cautious. "After a certain point, they won't do the loan at all," Goodman said in an interview.
Rising delinquencies and foreclosures following the housing crash overwhelmed servicers. As foreclosures took longer to process, regulators kept imposing more requirements on servicers.
Fannie Mae, Freddie Mac and Federal Housing Administration servicers are essentially fined for failing to meet certain timelines in processing foreclosures.
While the Federal Housing Finance Agency recently announced changes that will substantially reduce the costs of servicing Fannie and Freddie loans, "more needs to be done," Goodman said in the report.
When it comes to servicing FHA nonperforming loans, the costs are much higher.
"Servicing delinquent FHA loans presents an even greater challenge, reflecting both rigid and unrealistic timelines as well as inflexible and cost limits," the report says.
David Stevens, the MBA's president and chief executive, said FHA servicing requirements are outdated and expose lenders/servicers to "extraordinary penalties."
To protect themselves, "lenders are putting overlays in place and trying to reduce the likelihood of making a loan that will ever go into default," said Stevens, a former FHA commissioner, in an interview.
MBA is recommending that FHA model its servicing requirements after Fannie and Freddie's recent changes.
"The GSEs are so far ahead of FHA in this regard," Stevens said. But so far, FHA has not moved in that direction.
Still, Brian Chappelle, a mortgage consultant, said he expects the Goodman report will stir some action from the agency.
"We will not be surprised if FHA makes changes to address at least some of the issues raised in this analysis," he said in an update to clients. Chappelle is a co-founder of Potomac Partners in Washington.
FHA did not respond to a request for comment.
Housing and Urban Development Secretary Julian Castro recently announced FHA is reducing its mortgage insurance premiums by 50 basis points to make FHA loans more affordable.
Stevens noted this reduction will make FHA more attractive to borrowers who currently qualified for an FHA-insured single-family. However, it will not open the door for borrowers with lower credit scores.
If policymakers want to expand the credit box, "they are going to have to create an operational environment that doesn't put lenders and servicers at such high risk of financial loss," Stevens said.
Goodman claims it is time to address servicing costs if policymakers want to increase access to credit. But that will take a major effort similar to the one that led to the recent development of new Fannie and Freddie representation and warranties policies.
"We have come such a long way in terms of dealing with rep and warrant issues. We have not begun to address the servicing issues," Goodman said in the interview.
Last July, JPMorgan Chase chairman and chief executive Jamie Dimon made a big splash when he declared Chase would reduce its FHA loan originations.
During a conference call on Wednesday, Dimon noted that Chase has reduced its share of FHA business and he cited two reasons, including the high cost of servicing FHA loans.
"One is the ongoing liability on the production side where the insurance is worthless over time. And the second is just the cost of servicing FHA loans when they are going into default and they have a much higher chance of going to default than not," Dimon said during a conference call on the bank's fourth quarter earnings.
Last February, Chase agreed to pay $614 million to settle claims by FHA and the Department of Justice that it improperly approved FHA-insured loans that did not meet the agency's underwriting standards.
