A funny thing happened on the way out of the housing bubble: with home prices crashing in several once-red-hot housing markets, it appears that Americans now owe less on their homes than they did last year.
Of course, this could be a short-term hiccup on the road to higher servicing balances in the years ahead, but for the first time since National Mortgage News began tracking servicing balances a decade ago, mortgage debt fell on a sequential basis: $9.8 trillion at March 31, compared with $10.1 trillion at yearend.
Overall, the lower balance owed should not come as a total surprise. Millions of homes have entered foreclosure the past two years. When servicers finally take title and place the house back on the market, the "new" sales price will be lower — in some cases much lower — than the old price.
What this effectively does is reduce not only the outstanding mortgage bill for the nation, but it lowers the base of receivables that mortgage bankers can earn servicing fees on.
"The numbers are definitely declining," said Jay Brinkmann, chief economist for the Mortgage Bankers Association. The trade group tracks mortgage debt differently than National Mortgage News, but has had similar findings. (Data from the Federal Reserve has also shown a steady decline in outstanding mortgage debt.)
Brinkmann is quick to point out that the last $2 trillion increase in mortgage debt (that is, servicing rights) was achieved in just two years time. "Before that, it took three years to grow it by $2 trillion, before that, four years, before that, 10 years, before that 37 years."
It's no secret why mortgage debt grew so rapidly this past decade. Cash-out refinancings allowed consumers to use their home equity like an automated teller machine, withdrawing money based on what later proved to be inflated values.
But it's not only lower values driving down servicing balances. It seems more Americans are choosing to pay down their mortgages at an accelerated pace. That's good for Americans' balance sheets, but for residential servicers that earn their keep processing millions of mortgages each month, it's a dicey proposition.
The typical Fannie Mae or Freddie Mac loan pays an average servicing fee of 23 basis points. Mortgages that go into Government National Mortgage Association securities carry a 44-basis-point servicing fee. If a servicer's receivables fall so, too, will its net income.
Falling mortgage debt is likely the chief reason some of the nation's top servicers saw declines in their servicing portfolios in the first quarter. According to figures compiled by National Mortgage News and the Quarterly Data Report, seven of the nation's top 20 mortgage servicers experienced a decline in receivables compared with a year earlier. Bank of America Corp. and Wells Fargo & Co., which have a combined market share just shy of 40%, had growth of 2% each. That compares with 22% servicing growth at B of A in the first quarter of 2008, and 8% growth at Wells Fargo.
Gordon Albrecht, executive vice president of specialty servicer FCI Lender Services in Anaheim Hills, Calif., said that when it comes to home values, "the worst of the damage is already done. What lies ahead won't be so bad."