tv Seminar Focuses on Public Policy and the Mortgage Market CSPAN August 19, 2016 8:27am-10:01am EDT
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latest events. it's devoted exclusively to non- fiction books. television to non- fiction readers. up next, a discussion on a housing finance policy. they talked about the mortgage servicing market and roles governing home loan lenders. it was hosted by the urban institute. >> hello everybody. thank you for coming to our evening event on emerging issues in mortgage servicing. we have an oversized crowd and it's so great. i am representing core logics
tonight. it's a global provider of consumer and financial information and services in both industry and the government. in fact, tonight is a collaboration that we have had with the urban institute for going on for years. we are please to be a cosponsor of this event with the urban institute. thank you so much for being here tonight we will talk about mortgage servicing and most of you may not have known much seven or eight years ago. the financial crisis, fast-forward, we have a lot to talk about in mortgage servicing including them model, the cost of servicing origination and access to credit. there are a lot of issues around mortgage servicing and you will hear from experts across the board in the financial sector in both the public and private
sector. first let me introduce briefly each panelist and then i will last them to speak for about ten minutes and we will open it up for questions and answers for this group. i think many of you know these panelist pretty well so i think we will have a great evening. thank you for being here. first we have marco to my left ad is a senior fellow. he works on highs housing finance, policy and institutional regulation. i think ed is best known in his role as acting director of the federal financing housing agency where he led the gop he threw conservatorship from 2009 - 2014. welcome ad. next we have lori and she is the program manager for the consumer protection bureau. she is also the director of
politics at the office for homeownership preservation program and an architect of the making homes affordable at treasury. she has many years in the industry and we've gone way back through the financial crisis. she has done a great job. next we have michael. he is a fellow at the bipartisan policy center for finance and he works on housing finance. michael was a senior policy advisor to the white house and before that, a senior advisor to the office of treasury, the secretary of the treasury and we are delighted to have him with us tonight as well. >> next we have lori goodman. she needs no introduction in this crowd. she is the codirector of the urban institute housing finance policy center along with. [inaudible] who recently joined the institute. she is a researcher and publisher, she has over 200
articles and publication and is well known and informed a lot of policymakers and public on housing finance. last we have. [inaudible] he is a senior vice president at wells fargo. he managed regulation within side wells fargo and interestingly he helped start a platform of an online banking platform. welcome regular. >> thanks for taking time out to be here. this is an important topic. it's important for consumers, certainly. it's in port and to the housing finance system and the many participants in this ecosystem of housing finance. what i am going to do is focus
on servicing compensation. that is something that hasn't changed for decades as the servicing world itself has undergone profound changes. let me talk about first why it is an issue. a lot of it is applicable to the private market so forth but i think for simplicity we will focus on fannie and freddie. why the compensation needs to be addressed. you know, since the 19 '80s service and compensation has been flat. them minimum fee required required of anything with 25 basis point. the broad consensus consensus that this 25 basis point minimum fee was exceeding the actual
cost in servicing the loan and yet it's less than needed for nonperforming loans. as we are about to see it's become even more pronounced in that case. i only have one chart but let's turn to it now. they published this chart a few weeks ago. [inaudible] we been doing this from 2008 - 2008 - 2015. a few things stand out. the cost of servicing and performing loans is much less than servicing the nonperforming loans. but both are growing. i point out two things about this from comparing 2008 - 2015. in 2008, it was eight times more expensive.
the cost of both have gone up. this in flexibility in servicing compensation (he and freddie scrambling to beat up operations and make the effort with consumers and homeowners who are having trouble with their mortgages. we ended up with a lot of additional compensation being paid out in the form of incentive fees. that was done in the midst of the crisis and something ought to be addressed given the stark differences. another credible reason we need to address this issue is mortgage servicing rights. the current compensation system that we got creates. [inaudible] it represents the cash flow to servicers when alone is sold to fannie or freddie. this future cast flow last as long as the mortgage does so
economically acts like an interest-only strip. so if borrowers prepay, suddenly suddenly that long goes away and there's no compensation coming in. and msr is a very volatile asset it's difficult to manage, difficult to hedge and requires a great deal of capital to hold on your balance sheet. it lends to potential risk and instability of holders of it and because of these characteristics it tends to limit its holders to larger more sophisticated. [inaudible] making it harder for midsize to compete. we should want less systemic
risk so i think we should fix this. regulators working, do they allow for entry and exit and liquidity in the market? is the value transparent? right now the answer to this question for msr is largely no. let's fix it. in the end we should be looking for a model that allows and encourages responsive servicing for homeowners, efficient mitigation to help troubled homeowners and sufficient compensation to achieve that outcome, reduced volatility and increased competition. now, back in 20112011 when i was the acting director, we tried to tackle this issue. we began a public discussion
with market but to spends about how to change servicing compensation. there was a lot of discussion. the industry itself has been engaged in these debates for a long time. at the start of 2011 we wanted to systematically explore new compensation structures and we wanted to engage market participants in this process. we wanted an outcome better for servicers and consumers and fannie and freddie. initially we proposed for general approaches. we had a series of meeting and went through and then in september 2011 we published a formal public comment on two general options. one was to reduce the minimum servicing fee in order to reduce
the msr but also to create a reserve fund that would be there to help pay for the higher cost of nonperforming loan servicing and the other was to go a different direction. the feedback we got in 2011 was we don't have consent. there was really general agreement on a couple things. there is general agreement that for most people, this system is not ideal even if some did want to change it, but moreover the comments that we got where this wasn't really the right time to deal with this. the mortgage market is fragile and servicers have their hands full trying to keep up with the evolving loan modification program. finally, really importantly, we didn't know what the requirements were going to look like going forward.
it was hard to project compensation. they tabled the issue but speaking for myself, it was always something i was was convinced needed to be addressed once the timing was right and frankly i think the timing is right right now to begin re-examining this issue and reconsidering it. as that reconsideration goes, i think there is more important changes in 2011 to take note of. first, as we are about to hear from lori, we have much better idea about what those servicing rules are. it's published at servicing standards and they just published some additions to it that we will hear about in a moment. these rules provide a pretty detailed prescription about what is required of servicers and nonperforming loans. we've got much better information now.
other key changes are, we now have an evolving credit risk transfer market. back in 2011 it was with fannie and freddie. this was really about a line between the servicer. [inaudible] they are an important part of this discussion. they are the one in a lost position. how service is done and how it's compensated falls right into how pricing and crt works. that's going to be part of the discussion this time around. were making progress toward disclosure. this means investors will have a better idea of who is servicing and how things are being done and we made a lot of improvement and investment.
i won't get into the technical part of it but the msr serves as protection. with that situation the needs change. in conclusion i really think the time is right to re-examine this i think it can enhance competition and makes the market open to more players and can reduce financial risk for a lot of financial institutions. now that we have cf pd rules in place and the market is maturing, i think it's time to reengage in this conversation. let me say one other thing that's connected but is not actually about compensation. i think it's connected to it. another thing that needs to be picked up is to pick up and continue the work on standardizing mortgage servicing data. some of you recall bad back in 2010 we started this uniform mortgage data program to standardize data.
on that agenda was mortgage servicing data. i think as we think about these foreclosures we think about the credit investors and where this is all going, it's going to be important to pick up that challenge of standardizing data so this would help the market in mortgage servicing be more transparent. >> thank you, that's great, great. we will touch base and as each of you speak it might be interesting to hear your perspective to address servicing compensation. >> thank you. welcome to all of you. as you may be aware on august 4 the bureau published a final servicing rule, a modest 900 pages for for your summer reading enjoyment. the rule of men's the 2013 role and it includes quite a lot of
clarifications. not so many changes but a lot of clarifications and clean up. many things that the mortgage servicer themselves came and asked if we would correct. it also introduces some new requirements that were extremely important to consumer advocates. things like successors in interest, servicing, borrows in bankruptcy and loss mitigation. this rule is effective in 12 months from publication in the federal register which, if that happens this month would be august 2017. the bankruptcy portion would be effective in 18 months. that would be february 2018. in what can only be attributed to lori goodman's playful sense of humor, i have now have now
nine minutes to describe 900 pages. buckle your seatbelt, here we go. first let me talk about some of the changes that servicers specifically asked them to make to the rules. these are verifications that services can indeed enter into without completing complete documentation. they can. [inaudible] clarification on how servicers select reasonable date deadline for borrowers to send in the rest of the documents they are missing for their application. servicers and advocates interested, can we just do 30 days, to we have to have all of these time frames that we have to try to calculate and we said sure sort of. yes you can do 30 days but you
also have to take certain consumer time frames into consideration. a clarification on the use of acceleration to address nonmonetary defaults. our current rule doesn't really have a way for those if there's a nonmonetary so generally servicers will no longer be required to send periodic statements if they've charged off alone. if you charge off your not collecting interest obviously that's a no. exemption from the 120 day foreclosure when a servicer is joining the action of a senior or junior lien holder and then something as simple as, can can you please put a loan number on the insurance form. these are not all of the servicer request changes but
they're sort of indicative of the kinds of things of the practical changes we were able to make. there are certain aspects of the rules that are more challenging and certainly more important in terms of adding consumer protection. one of those which probably engendered the most in the room, successor in interest, i'm sure y'all know this but it someone who has acquired an ownership interest in a property that is not on the mortgage and they don't have a direct relationship with the servicer of the loan, but they need information in order to protect the asset that they own. the rule basically has three parts in the first is the definition of who a successor is and we have created a definition that is basically consistent with the scope of the sale
protections. if you have due on sale protections then you would also have successor in interest protection basically in the servicing rule. that includes individuals that have acquired property by death of a joint tenant, death of the borrower, transfer of transfer of ownership to a spouse or children, legal divorce or separation and then moving to an interview trust where the borrower is the beneficiary. first it's the definition. the next part of the rule recently says it outlines requirements for communicating with potential successors. i raise my hand, i sam the successor, what you do. we had significant feedback from the advocacy area that they
didn't want to talk to sensors and they had a difficult time communicating. it outlines some very specific requirements. if they contact the servicer they are required to promptly respond with the type of documents that successor would need to prove they are the successor. for example, if i am recently widowed and i am on the title to the pop property but not on the note what would those documents be. one would think that is simple but it has been made fairly complicated. identifying those documents that are most common, providing them timely and then when you receive the documents, reviewing them and responding with the decision timely are all elements.
finally the rule gives borrower status to confirmed successors which means the borrower is entitled to all of the protections under most of the servicing rules. they are entitled to get periodic statements and insurance notices and protections under the rule. what does the rule not do? we have a lot of comments as i mentioned on this rule. services were extremely concerned about their liability and responsibility for what the rule does not do is it does not create a private right of action for unconfirmed successors. it does not require servicers to proactively go out looking for successors when they find out someone has died. if his successor contact them they have an obligation to work with that individual but they don't have to start doing a search to go and find them. it does not require servicers to
offer any loss mitigation options to a successor and interest but has not assume the loan. they may, but they don't have to. however, they can condition and evaluation for loss mitigation on an assumption. finally, it does not require servicers to provide periodic statements or any of the other notices required under the rule to more than one individual on the loan. if there is still is a remaining borrower, even if you have one or two or three successors, you can continue to communicate with your existing borrower. you don't have to send multiple notices to multiple people. borrowers in bankruptcy, certain parsers borrowers in bankruptcy who intend to retain home home ownership will be entitled to receive a monthly periodic statement or coupon book or whatever that has specifically
been modified for the bankruptcy they will continue to be exempt from live contact in early intervention. finally, the rule has provided sample notices that were extensively consumer tested specifically for bankruptcy so servicers don't have to go out and try to figure out how to create their own periodic statement notice. servicing transfers, the rule says a transfer service officer must step into the shoes of the transfer so that servicing transfers do not adversely impact consumers. it's really straightforward. the servicer has no say over whether their loan gets transferred in the transferee and the transfer have to figure it out so the consumer is not harmed in this transaction.
that said, we do understand there are some limited exceptions, especially when loss prevention is in play where it is difficult for the new servicer to be able to respond timely because of timing differentials given all of this embodied information from place to place. we have carved out a couple very specific exceptions. for example, if a loss mitigation application is received within five days of the transfer date, that servicer may not have the opportunity to review that and send the five-day acknowledgment notice until that borrower what documents they need to complete their documentation. the transferee will be required to do that but they will have ten days after the transfer to make that happen. so again, extra time. same thing is true in the case
of a completed application. if a borrower has submitted a completed application within a short time prior to the transfer in the transfer, the transferee is required to do so. same application. don't ask me for more documents. don't make me re-create everything. look in my application and make a decision but they will have 30 days after the transfer to do that. they should have plenty of time in order to make those things happen. there are a couple other nuances in there about appeals and some other things and there's also some protections for the borrower because their time frames are being pushed out, but essentially that's the transfer servicing rule. finally for loss mitigation, there are number of changes in the loss mitigation space. many of those changes were driven specifically by servicers themselves saying give us more flexibility here and there.
however there are couple that i want to point out in the first one and probably the most important is the end of the one bite role. basically in our current servicing rules, all of the protections in loss mitigation only apply to a borrower one time during the entire life of the loan. if a borrower has an adverse event or loan modification, four years later and something terrible happens then they don't get any protections of the rule in the current role. this will change and a borrower will be entitled to the protection of the rule more than once in the life of the loan if they have submitted an application, regardless if they got the marker didn't get the mark. then, they reperform under that loan. re- performance could be a permanent modifications, a check
from aunt mary, it doesn't matter. if they reinstate the loan, then in the future if they have an adverse event they can reapply. there is a new requirement and they cement all their documents and under our new rule there's no requirement that the servicer tells them you are done. yes we have your stuff. under the new rule there will be that requirement, a notice of fleet application. finally the rule defines delinquency with respect to the servicing provision of reg x. that doesn't mean you can't have other definitions and you can't say that you're not delinquent
until after the 15 day grace period or don't really think my customers are delinquent until after 30 days, for your own purposes you can have whatever definition of delinquency you want. for the purpose of counting the requirements of the rule, when you send the notices, how do you count 120 days of delinquency before you can take first legal action. obviously, lots of other things we can talk about but how did i do? >> you did pretty well, 900 pages. how. how long did it take you to read or develop this. we published a proposed rule in november 2014. >> michael we are excited to hear from you in your new role. let me just comment on three
things. one is the loss mitigation standards issue now that the crisis era and making housing in homes affordable programs are all expiring. secondly, i would like to really support an elaborate on some of ed's comments on the importance of the service of compensation reform and then close with floating an idea for a different kind of's vessel servicer. with respect to loss mitigation standards, i've always been of the opinion that whoever owns or guarantees your mortgage determines what borrowers options are when they become troubled and distressed. i've always supported the notion
of national loss mitigation standards while congress is not really all pined on that, really, really administration directly, in our housing finance reform work, we supported and the senate banking majority that voted that bill out of committee really agreed there ought to be national loss mitigation standards and included a provision for joint rulemaking between what the regulator would be until the successors through fannie and freddie and cf pd in consultation. :
looking forward to the release of the nba one mod report and continued engagement around the developing of consensus standards. i keep really hoping for the adoption of kind of national standards so that all borrowers are on a level playing field. with respect to compensation reform, again going back to the fsoc report, we all recognized the need to align incentives with the escalating costs of servicing nonperforming loans.
and did not report in 2013, called for efforts to implement, and i quote, compensation structures that align incentives of mortgage servicing with those of borrowers and other participants in the mortgage market. we tried but unsuccessfully to actually get into johnson-crapo in the joint rulemaking for national loss mitigation standards, also compensation reform. i continue to believe that it's very important to move on that issue. ed made the case were no longer in the gse 100% guarantee but in a world of credit risk transfer where a line interest with those who are taking credit risk with mortgage servicing, particularly of nonperforming loans, becomes
increasingly important. i just wanted to point out that in a recent securitization of jpmorgan chase earlier this year, the securitization is the first that has gone to market under what is called the fdic safe harbor rule. the safe harbor rule really is about if you meet the requirements of fdic, that went into effect in september 2010, on the collateral would be protected that supports really the bonds that have bought by private investors in the event that the issuer goes bankrupt. but in addition to that safe harbor, the fdic rules require really an alignment of interest
in the servicing issue. and it requires service of compensation to include incentives are servicing and loss mitigation action. so this deal that went to market that is out there really has adopted a compensation structure in a fee for service structure similar to one of the options that ed spoke about and put out in the 2011 white paper that is really interesting and something we all should be both interested in and following. so instead of a flat 25 basis point servicing fee, i/o strip, it is really a compensation structure in three parts. it establishes a base of servicing fee for performing loans of $19 a month per loan. incentives, there are monitor
incentives to the service or. window of those loans go into delinquency. $200 a loan per month for loans that are 30-119 days delinquent but not in foreclosure or in rtl. it escalates to $252 per month. if there are 120 days or more delinquent. and then there's a series of wonton event driven fees, $1500 for a new pleaded short sale to the servicer. $500 per completed deed in lieu of foreclosure. $1000 per completed third party sales, and $1000 for a completed are we occiio. there are actually now examples of how a menu fee-for-service compensation structure in a
multitiered securitization with the number of tranches that are taking mortgage credit risk out there in the marketplace that we should be following. so that's the second thing. let me just close by mentioning way back when i joined the treasury and resolve the escalation and knew about these rising cost and we certainly didn't know how much they're going to rise relative to the cost of servicing performing loans, although costs of servicing performing loans have gone up significantly as well. so a few of us at treasury, this is purely at the staff level, never went up the chain of command, were thinking about whether or not as we saw the reputation risk as we saw big banks beginning to kind of be hesitant, putting overlays on
not wanting to take really that next chance of originating loans with a higher probability, likelihood of going into delinquency and default. whether or not those lenders might be interested in getting together and creating essentially a nonprofit cooperatively owned special servicer that would really take the responsibility of servicing fees a link would loans on a rules based best practice base where you have a situation in a fee for service world where that co-op would not be having to earn private equity rates of return, but would really be able to apply best practices, loss mitigation standards in the best
interest, maximizing npv where maybe that would give banks more comfort in moving up that risk curve where you have credit qualified borrowers but with that higher chance of default. so i'm not going to go into any collaboration on that i would like to put that out there. >> thank you, michael. i think we'v we seen such a shit from the banks withdrawing from some of the market in the nonperforming space that it will be interesting to further discuss institutions in both cycles of the market and hold that thought. laurie? >> thank you very much. before picking up some of the themes you heard, i would like to discuss three sweeping structural changes that have affected the industry.
the first is the rise of the non-bank servicers. we have alluded to this but the numbers are really, really start. non-bank servicers comprise 34% of the servicing assets at the top 50 institutions in the second quarter of 2016. this is up 3% from the end of 2015. it is up 28% from 2010 period you can see that very, very rapid shift between the bank and the non-bank services, with the non-bank servicers gaining market share. the second trend is that the consolidation of the industry. the top five services comprise 37% of one to four family of than in 2001. it rose to 59% by 2009 and is now down to 37%.
one of the top five of the non-think services nation star is five of top 10. there's been an incredible deconsolidation of the industry. the third trend i want to talk about is the rise of southern servicers. approximately 1.6 trillion of the 10 billion in single-family servicing is sub surfaced. this is up from 1.15 trillion in 2014. that is two years ago. this is a natural outflow of the deconsolidation of the industry. servicing is a scale business. so much outsource everything. some want to outsource only delinquent loans but certainly as the industry continues, you should expect more sub servicer activity. i think there will be a number of themes that will receive considerable attention in the years ahead.
mike talked about loss mitigation standards and talk about servicing competition for that unlik i would like the opportunity to pile on there. finally the potential need for greater prudential regulation of non-bank servicing. let me start with the need for servicing compensation reform. this is actually, thanks to the mba, we've seen the cost of searching a performer love this $181 a year. a nonperforming loan is 2003 at $86 per in them. but institution service all loans at the same price now. that price is 25 basis points. your average loan size is about 215,000, 25 basis points, $538 per year. you're losing a ton of money on your nonperforming loans. you're making a ton of money on
your performing loans. this 25 basis points has been unchanged since the mid 1980s, toward the back of the average loan size has grown considerably, and technological advances have made it less costly to service performing loans. you could have a cost structure that is misaligned. secondly, someone made the point the msr asset is very volatile. really reducing the size would decrease its volatility. this is particularly board and wrote a which nonbanks have grown in importance. when the first talked about this in 2011 we were in a world where banks were very important to what we concerned about was the new basel three role with with -- would be fully phased in 2010 would create a problem for the banks. that is, if msr assets are under
10% of capital, the capital charges 250%. over 10%, its a dollar for dollar deduction. a capital charge of 1250%, a huge escalation on the old level. at this point, however, the number of banks with significant servicing assets over 10% is very, very low. however the real problem is for the nonbanks. you probably can't see this slide all that well but basically what they shows you is that msr assets are very, very small percentage of total bank assets. they are a very, very large percentage of non-bank assets. nonbanks are not consistently better capitalized than their bank counterparts. so the bottle in this our assets we were to but in 2011 in relation to banks are really a
far more major problem for the nonbanks at this point in time. however it is much more difficult to say that the current system doesn't work that it is to come up with something better. there are two possibilities that were discussed in 2011. the reserve account and then the more fundamental change which is the fee-for-service approach. in today's environment neither of these is a slamdunk. the first is an easier change. however, the second fits the growing non-bank servicer model much, much better. under the current system our concern is servicers may skimp on nonperforming loan servicing. however if we move to a fee-for-service basis with compensation reform, will tashfeen malik be disincentive when to collect higher fees if they wait? another set of issues, certainly a fee-for-service approach would
facilitate the transfer of delinquent loans at 120 days of delinquent for those that are able to do delinquent servicing. however, the problem, if you modify early, if we transfer, the borrower will likely be in the middle of a modification. laurie talk about the issues of trying to transfer a loan when you're in the middle of a loss mitigation process. when you think about mandatory servicing transfer, as what mike was talking about, that's very problematic. and finally we have to think about servicing and its impact on asset to credit. if we were to reform servicing either of the mechanisms discussed, the reserve account was a fee-for-service basis, it introduces risk based pricing into the servicing a question. do we want to offset this?
so that's sort of the senate issues i think about when i think about servicing compensation reform, which i support in 2011 and continued to do so. there's no easy solution. the second topic i like to address is the need for greater regulation of non-bank servicers. right now the cfpb is responsible for regulation as it relates to the consumer experience. nonbanks essentially have no federal prudential regulator whatsoever. the gses and ginnie mae each other on capital liquidity requirements of these entities are much, much lighter than bank capital requirements imposed by the bank regulators. the prudential regulations in the current environment is essentially provided by the warehouse lenders who can pull the lines of business when they feel the entities are too risky and essentially drive them out of business. ed made the point that msr's
have substantial exposure to interest rate risk and default and for non-bank services as we saw in this slide, that represents a considerable amount of their total assets. the volatility of these assets constrained income cash flow and liquidity during pics of either sharply falling interest rates are rising default rates. if we do servicing compensation reform and end up with a fee-for-service model, then we really don't need any sort of prudential regulator because these problems largely go away. if we don't do servicing compensation reform, the non-bank servicers need more regulation, higher capital liquidity requirements when none of these entities are systematically important? can we just transfer the servicing? i think the answer is yes, you could if the federal isolated. we don't want a breakthrough system that assumed that institutions will ever fail.
we are concerned about systemic risk. if the failures are due to macroeconomic factors, and most will be due to either sharply falling interest rates are rising default rates, a lot of the institutions fail at the same time, there may be insufficient capacity to transfer servicing to an ability costly for the gses and for ginnie mae to do the servicing transfers. our view is that the minimum, output requirements should be risk-based. currently the gses and ginnie mae requires the same capital requirements regardless of how much msr exposure each institution has an effective their hedges are. another complicating factor is the non-bank servicers are an incredibly diverse group of some have sizable mortgage origination operations that provide a national hedge while others rely on servicing income extensively. i know the idea of the self regulatory board decision
imploded with the nonbank entities subject to stress test. the question in my mind is that the industry is capable of doing a self regulatory organization with enough teeth to be meaningful stress testing. one thing is certain, both servicing compensation a prudential regulation of non-bank servicers are issues that we'll be hearing a lot more about in the year ahead. thank you very much. >> thanks so much. as kind of speaks, one thing to keep in the thing is were also dominated by heavy government footprint of linda and karen toward business. what i have heard tonight is what the investor will is and they fled this market. servicing and investors have had a tough road over the last several years. i would like those the kind of weak and that if we get back to more normal less markets, whatever it looks like, how do
we protect both the consumer and the investor from participating in bringing more by the capital to the market? >> i had a choice of going before or after laurie goodman. i think i might've chosen poorly in that, still processing some of what a great comments were. let me try to provide a reaction some of the things we heard on the panel today. faiths that let me provide a view from industry as well on questions about servicing. as i do i will try to address the slide you see in front of you that provides a reaction to servicing cobb as well. the last to undergo servicing come as a short form coming up once in 2011 under mr. narcos leadership at fhfa at fhfa put out a very thoughtful discussion paper argued for a couple models about servicing and compensation reform, the base model, the silly reserve model. a lot of good discussion back in
20 lebanon servicing, reform. what i'm reminded of his a lot of things have changed since 2011 as a the last five years. a lot of good things. we've had a lot of reforms in the customer market for mortgage servicing. we have 2000 pages of rules from the cfpb on servicing standards to keep the iphone in line. the industry knows every specs the name of laurie so that's a good thing. for more as well. second as ed talked about, there's been a lot of work on gses. they've done a lot of work on disclosures. the co to market is getting off the ground and evolving right now as well. that's very good. we've seen a growth in diversity in the mortgage servicing industry as well. laurie talk to nonbanks coming in. we've seen services for specialized or various size come into the market. we think having diversity in the
servicing industry is a good thing. that's usually a sign of a healthy market. at least we have one indicator trending in that direction. these are some of the things that are going really, really well right now. i will also point out, i recall in 20 lebanon as the conversation came up, a lot of focusing on reform was not around what sort of model should we have for compensation but rather whether servicers were making money off of customers who are in distress by delaying the foreclosure process, pushing that comics in the into collecting fees off of that. i do want to speak to what happened in 2011 but i want to say from my perspective we are very pleased to see a lot of that, if that is been there in 2011, a lot of that has change. much of a good workout to see the -- cfpb. one example of wells fargo, less than half of 1% of anybody when they can servicing comes from late fees. we forget late fees if a customer goes through a
modification. that's not part of the business and fortunately that's not something we see in industry. these are good things we see right now. of the things have changed in the last five years as well. the servicing costs is a good example. i'm not sure how well you can see the numbers. i can't say the numbers that well. maybe i don't want to. maybe i just don't want to see the numbers is the truth. back of the envelope when you think about it, think about performing. costs on servicing perform loans has gone up three times in the last five years. five times for nonperforming loans. costs have gone up both for loans which perform other customers who pay their bills and on time and for those who need help with their mortgages. profit of risen dramatically in the last five years. batchelder kluger as laurie said, sort of the back of our minds the fact is accredited build issue as well. there are too many americans who
are not able to get homes, particularly those who are first-time homebuyers in this market. that's something that's very important to the industry and to wells fargo as well. we know all of these things. as a look at this slide, there's lots of ways to slice the cost data. you will see the cost data slide by perform those for nonperforming loans are different parts of the visitor to take away is that the servicing business is complex and billy costly and billy complicated. that's true. at many levels it's true the industry is very, very complex. what i fear is when we talk about the complexity of the business obscures what we do to fix things as well. i'm going to attempt to bring it up a couple levels. maybe boil the servicing business model down to a sort of two or three census in hopes that might help us understand where we can go from here as
well. generally there are two parts in any servicing this is the you have your business or your service perform loans, the customers who pay the bills and on time. the vast majority of americans in this country. in your nonperforming loans. for whatever reason they need some help, need specialist service to be able to service those things. the performing own business as you probably know is a business which has very predictable revenues, very i think the term was back office, forgot the term but very normalized type of business generally. then you've got your nonperforming loan business which is completely different nonperforming loans. this is a business where don't have a lot fixed cost. cost can be unpredictable and customers you're in loans with having difficulty paying the back, nonperforming loans, depersonalized a. this is not a business that
could be tremendously automated as well. we've got these two parts to the business that ultimately most servicers are trying to balance. what a servicer will to produce they would take the money to make any performing own business and able use the money to make investments in nonperforming loans. nobody is looking to make a buck off of nonperforming loans. you've got those ballots model. we make money off of performing those and you said to work on the unpredictable costs that happen with nonperforming loans. that's fine. that's changed now. it changed america in the last five years and this change because of the cost you see. in perform loans margins have gotten thinner. nonperforming loans, costs have gone. but we haven't talked about which is more important than the cost of nonperforming loans is the unpredictability of costs.
we are seeing at the same time we've seen cost go up in perform loans three times in the last five years would see the unpredictability of costs of nonperforming loans go up. that rising at the same time has caused a lot of issues. having said that, what can you really do about that? a couple things perhaps i will suggest. one is we can look at the performing own business and say what our costs going up? what our costs going up for those tens of millions of loans. there was a lot of reasons for that period it's more than i can go into in the remaining time i have. i will make one comment that the servicing industry really hasn't had time to catch its breath in the last few years. we have been operationalizing either new regulations or rules from investors constantly for
the last few years and was were all of those. we think there are good things. we support the recent work that laurie has done in bankruptcy statements and the recent standards as well. we support all of that but what it suggests is that every year there's more work, more operations can worst of that is being operationalized. that's not necessarily a bad thing although we will work through that. what it charges were not able to normalized those costs. every year we're putting off something and we haven't normalized that. would look at this chart and i see performed low-cost rising high, i would expect that trend to continue the more than the continuing to implement new rules and standards on an annual basis. we were able to normalized this and come to the efficiencies i think that number will perhaps shift a little bit. the second thing i would say is reducing the incidence of customers going into default, reducing the incidence of nonperforming loans.
i think the gses under the leadership of fhfa have done very good work. mike talked about hamp, determines program, love of learning for the industry and all participants from hamp, work taking point on hamp 2.4 but never that type of work reduces the incidence of customers having difficulty going down the road you want to go down creating a lot of the other issues we talked about. however, sort of the pictures different on that fha. we cannot to talk about much but it's very important. we service 30% of all of page a loans. fhfa is very important to become ministers under relationship to fha is also very important to us. this is a case we start to see a convergence between the gses and fha. fhs modifications and options are very limited and often lead
to borrow outcomes that are not as beneficial as we would like to see. if anybody wants to read the metrics support i can end of a deep it will show you the default rates for fha and -- the options are far less than with a juicy loan. second can reducing the incidence of default, senator burgess, really good work under the leadership of fhfa, work necessary likely fha space as well. the third part is the unpredictable of default cost the i'm not trying to minimize the rising default cost. i think mike and lori enable them has talked about that. the unpredictability something which gets just as much attention as the cost of separate the inability to know what you're on the hook for, the inability to plan or budget for, money might need to spend is a
critical issue. as much as infidels i think causes a lot of concern about the fall. the cost is the unpredictability. we start to see a convergence with the gses and fha as well. fannie mae and freddie mac along with fhfa have done some work around warrants and others as well two really make this a little bit more predictable. to help services understand what accountable for and what the penalties will be tested to meet those standards. different case and fha and probably the most significant issue we have right now in the servicing industry is the unpredictability of costs and fha servicing space. we have situations where it's hard to predict penalties of sosa with missing foreclosure deadlines and fha space. hard to protect penalties for social with missing content standards. there's a lot of lack of clarity
in that space. i would argue the ability to bring clarity and predict to build into fha space is not as important mission as we have right now in addressing some of what we see in front of us in the servicing industry. those are my comments i think in general, sortable i think we can go from here. in no way am i trying to minimize the conversation around certain compensation reform or even some of the ideas that michael stegman has talked about. we need that type of dialogue and thought that we need to be pushing forward and reform is a word that probably is with us here for the long term. i just would suggest, to use a cliché phrase that we are at a bit of an inflection point. the inflection points again come back to the slide, the inflection point really is are we going to accept the way things are today or do we think that there can be some change. that's the inflection point.
if you accept that, costs will be extremely elevated in servicing, that is going to be unpredictability and a lot of these costs, that it's going to be hard reduce the incidence of default. if you accept that's what would happen that i think will have to start to look at some solutions which are more far-reaching than perhaps we talked about before. i am not there yet. i'm not there yet where i am saying we have to accept the way that is. if we did the opportunity nor will -- normalized come understand some the deal's michael stegman and is talked about, other work evolving as well. i'm not suggesting that reform doesn't happen but i think it's important that we really understand what is the condition of industry? what are we going to fix? >> thank you so much. one thing i think we shouldn't
lose is both reform for fha and hide as well as the gses and not talk about juicy reform without talking out the full housing market to have the most healthy market for us. we get to talk to you and your from you on what questions you have for this esteemed panel. so portions of the audience? please say who you are. >> todd wickens, citizen, and appreciate your presentation. want to ask about dodd-frank and whether you feel it has been an effective legislative initiati initiative, not to make a political statement but the think it was worth the trouble over all? >> i appreciate, really appreciate you asking the question because i didn't of reflective mode as well thinking
about 2011. i think reforms were necessary, absolutely. i think that there were reforms necessary in terms of how the industry was making loans, in terms of how we were servicing loans. there was a lot that we could do to get better. i think a lot of good things came out of dodd-frank. i think together as an industry along with many consumer advocates and others who care to be about the housing market, that we've been able to learn a lot about how do we serve customers and think thoughtfully about the ability to repay loans. qaeda we standardize about. i think the work laurie maggiano and her team have done have brought consistency to the customer. to a large extent i would say, reforms were necessary. many things came out of the dodd-frank act which are very positive. i also think many things came out of the learn is that the
financial crisis that didn't necessarily result from the dodd-frank act which are also positive. speaking from my seat, from sitting in a company at wells fargo, i know we spent a tremendous amount of time stepping back and listening to our customers, understanding how they felt, what their experience was like. that has changed just as much as regulations have changed as well. i think a lot of good things have happened in the last five or six years your. >> sarah? >> thank you, everybody for being here. terrific panel. a couple people mentioned it but i think it's worth mentioning again, the role, the story you told so compellingly most be played in constraints of access to credit. if you have these evermore extensive servicing of nonperforming loans, incentives originate loans might be at high
risk to nonperforming are likely to become more and more powerful. i think the point you made at the end about volatility and the lack of ability to predict. i think we don't think about servicing business in the same ways as far as hedging risk and sort of insuring against loss in the way we do on the credit enhancement side, on the credit risk site. but particularly with a lack of predictive models about costs of servicing. it's almost certainly has to be an aspect of constraint of credit. i hope the ban panel will spenda moment or two talking about those consequences as we go forward and talk about different servicing models, evaluate them in those terms. i am struck we've seen an enormous amount of thin tech innovation in parts of the financial services sector. particularly around how to access new customers.
but far less investment in how we manage and service existing customers. maybe because you've been reactive, but the startups are not investing in quite the same way about nonperforming loans, and i wonder whether nonperforming servicing is a place where it may be able to help us bring some of those costs down. i'd be curious to peoples reaction. >> yes. i mean, i think servicing is a huge constraint in terms of access to credit. we've written about it, about the uncertain costs that make it especially problematic if you can't document, if you can document the cos cost you confid how to price it in the if you can't document the cost, your reaction is all my god, i want to stay away from it. i think that's an important
contributor to the overlay that many of the lenders have on top of the gses, especially the fha credit box to the overlays are far more significant on the fha credit box at this point because of the fact that fha servicing is basically such a pain in the ass. and secondly the false claims act. the fact that you are so uncertain about conveyance, the fact that fha loans have, they don't have one timeline for the process. they have timelines for each aspect of the process and if you violate any one of the timelines you trip and uncertain penalty structure. i think that work still has to be cleared up and certainly addressing those two things would make a difference in terms of the overlays that the lenders are the top of the fha box. i can't emphasize enough how
important that fha box is, because for many of the sort of more credit constrained customers, fha is the only alternative. so those constraints, the overlays are particularly meaningful in that space. >> i will offer to reactions to the question into laura's comments. my first reaction is i agree on fha servicing. the unpredictability of cost in servicing is extraordinarily high. i do want to acknowledge that fha has been doing work in this space. they published some changes earlier this year specifically in proxy preservation of foreclosure timelines. a lot more really remains to be done. we can go into technicalities but i will briefly say it's nearly impossible for trent severn to predict the costs --
servicers to predict the cost would fha loan goes into default. it's a difficult process, and work needs to happen there. i had not planned to say this but i'll offer a comment back to your innovation peace as well. i have been with wells fargo for 14 years. in 2004 i was working in the online channel and my job was to work in the origination site. but i felt it was an opportunity in online servicing, online servicing for homeland. i moved into that space and have built out the online banking platform for wells fargo at that time. a point about images prior to the financial crisis wells fargo had invested tens of millions of dollars in an online platform trying to build services for its vast servicing portfolio. that portfolio grew from under 100,000 customers to over 5 million in about six years. we made a tremendous investment
all before the financial crisis in building out the type of infrastructure. we do make a commitment and investment in infrastructure at wells fargo now but there's less of an opportunity to make that on the front end, on the customer space so it's not a visual. you see that a lot pensions how we implement regulations or working on bankruptcy statemen statements, though it's been a lot of what of those types of things. i will say i think is remarkable given industry where you have tens of millions of customers, all of whom you have a captive interest at least once a month when they pay the mortgage, and that there's not a greater interest in entering that space. that to me, i don't have the answer but i think that's a remarkable sort of thing. >> is it fair to say as some who lived through the crisis with you and many of the others in the room, the legacy technology really was a burden to the industry? back to your point, raghu, the
lack of innovation weight against compliance, certainty lowering or minimizing risk and no one to get past that have all the work around have an effective system to that's my observation. >> i think laurie, i agree with what people said that i would appreciate the way you raised the fha point, including from a alt-a an investor standpoint because that is really important to whatever the cost is, if you know what it is and you can work with it. that really has to be addressed. not to put too nuanced a point on this, but we do price and have priced for the risk of a borrower being a potential default risk and hence the higher cost servicing the discussions focus on menacing -- minimum servicing fees but
that's not the whole story. banks originators can determine what kind of access i always want as a way of pricing and the expected additional cost of high risk loans. you've got to be careful about if you three things and you can only have two of them, which ones do you want? if you want to be extending their high leverage credit to folks with modest means or particularly volatile incomes are difficult in handling credit, we'll put a real regime about dealing with it to produce costs like this, then you got to allow something in there for those costs to be accounted for and priced. so perhaps rather than this being a traditional tug-of-war on this issue, we can try to be more thoughtful about extending credit to low and moderate
income households to folks that are more of the riskier borrowers into a using mortgage products, financial counseling, and other forms of assistance and support, it helps keep the borrower from becoming one of those orange loans. so you avoid, if you create a situation where you're more likely to succeed and less likely to be delinquent, then that's another path to dealing with this issue. but that's a bit of a different conversation and i think one that is way overdue, and including it is way overdue in the fha program. >> good point. >> i can probably contribute to the stabilization of the market by simply putting the content and going on vacation. [laughter] >> normalization. >> perhaps more seriously than
that, when we talk about synthetic and i didn't appreciate that comment, the basic core processing system that is used in this industry are really fabulous. they are ancient but they really, really work. they do what they're supposed to do. where we have seen the disconnect is in the special servicing, is in the default servicing the they were never designed to do that. they are just big core processing systems your as we go out and do supervisory work, we see that servicers have tried to compensate and throughout the entire crisis, goodness knows there were patches over patches and homemade programs and off the shelf programs. they just don't work very effectively with each other. we also are surprised, and part
of it was just everyone was moving too fast. it sort of ready, fire, aim. but i think that we have an opportunity in the industry for some interesting syn tech folks to come up, and we are aware of what the space is the devil is in default servicing, is in escrow servicing, those kinds of functions that are much higher touch with consumers. we really hope to see that. we published a special supervisory bolton not long ago where we made some observations that many of the noncompliance findings we found were directly attributable to systems that just don't work, systems that don't talk to each other, systems that don't communicate effectively with the core processing systems, that just don't have the capacity to do the tasks they are being asked to do.
great opportunity for some smart people to move into the space, and we sure hope it happens soon. >> we have time for a few more questions. >> i think raghu has already addressed my question. laurie for one has written extensively on the millions of borrowers who have been additionally assisted, improved access provided that resembled the condition before the housing crisis. so looking at that and getting an idea of that, what under more normal as conditions and less uncertainty, what would be the cost for performing and nonperforming loans? what would that look like? >> it's a good question, and my honest and candid answer to you is i don't know. it's very difficult to be able to predict but that is.
i have a suspicion that if you normalize costs and companies and alt-a are able to develop efficiencies, understand have to do things well, not going to cost go down the customer service goes up as well, which is also which is more important in many ways. i don't have a better answer for you. i wish i did. i have a suspicion that i think, as we started normalize come in any industry we see a tremendous upheaval, you start to see compliance move to operational excellence. that takes some time to really happen. >> hello. my name is agatha. thank you all for your time and
sharing of expertise. i had a question for michael stegman. noting in your first comment what can happen after hamp, so in the post and climate. you mentioned you in support of the national loss mitigation standard, standard across the board that would make sure that consumers in all borrowers on a level playing field. i was wondering if you could talk a little bit about what you mean. are you in favor of a more streamlined modification, income-based, or are you thinking about something more closely related to the one mod? >> i'm waiting to really see the final report on the one mod. clearly, it does deal both with the short-term interruption
problems which may be a streamlined, but i'm thinking, or should we have a single application, regardless of who owns your homes. who owns the loan. should there be with some flexibility and mpv kind of model where maybe discount rates and kind of choice is very because nondepository versus depositories have different cost of capital and so on. there is some controversy about whether there should be kind of a standard, but when i was doing low and moderate income affordable housing evaluation of precrisis, there was early
intervention on the part of, we talked about something called preventive servicing where very early on in a delinquency there was contact between a servicer and the borrower. there was scripting with call centers trying to engage borrowers on the extent of the attachment come of their attachment to their house and their kind of willingness to really try to make, to save their home, at the beginning of a conversation about a possible work out in those days it was called a workout. in the posted prices world it may not be possible to have that kind of conversation and short-circuit the waterfall and the whole process of beginning
on the modification kind of thing. we found that low and moderate income people whose payment records were more volatile, but the lincoln street -- delinquency rate not a good predictor of for closer. the early contact was made, it's hard, in the post, and the hamp world and the post-hamp world, unclear what servicers are allowed to do rmi do that might have a lot better chance of connecting with the borrowers early in the process and kind of helping them out. we need more conversations about that. it may well be that we can reach
consensus, but my view has been that ought to be a formal kind of rulemaking about this. >> quick question for the panel. do you think the judicial and nonjudicial state foreclosure timeline way into that same conversation? deals like -- one more. >> for raghu and laurie -- >> who are you with? >> compass point. for the cost increase, particularly on to nonperforming loan side, how much of that do you think has been driven by regulatory and legislative changes versus operational changes or inefficiencies as the number of nonperformers increase?
>> this is part and. the volume of loans if anything, you develop proxies. there is a definitely a regulatory aspect of it but there's also, you're trying to do more for the -- you required to be more than the borrower. that was the case your sicko but there's no loan per annum. >> that basically, i think there's a couple of things driving that caused. so clearly this is a space in the last five years that's become incredibly regulated. not just regulated from the cfpb sort of customer, consumer protection standard, but really rules driven from an investor standpoint as welcome particularly from the gses. this has changed incredibly over the last five or six just particularly in the agency over esb space. that drives a lot of cost.
having said that, i think to some degree this is going to be a part of that this is that's going to be a high-cost business. the other thing we've learned is really learned i think powerful in the last five or six years is that, this is what i would disagree a little bit with laurie maggiano's earlier point. of business when it difficulty making a payment, and he did talk to a person. and detail. they needed individual solution. this is not an automated process for them to this is not, there's very few standard situations when a customer is having difficulty make their payments. the other thing that the servicing industry is done isn't this significantly not just of the technology infrastructure of the people infrastructure to make sure that there's an actual person to work with over the customer who is in default. i know wells fargo and if it's true across industry we have a single point of contact when a customer goes to a default, work with them throughout the process.
today's question about normalization can you see some normalization but there are business and legislative and a faster decisions, regulatory investment decisions as will the likely result in some elevated costs for the duration. >> any closing comments from the panel? >> i will say i stand corrected. raghu is correct. it is a much a labor-intensive process and you have to have real people. a couple of panelists have mentioned the importance of counseling and getting borrowers to somebody who can help them understand the options they're being offered. at the same time there are certain things, for example, in the servicing transfer if the systems don't talk to each other and the documents don't transfer and information doesn't transfer, those people who are performing loans will catch up in the month, it's not a big deal. that people in nonperforming loans really, really get lost.
there are a lot of things that can be mechanized to determine, to ensure you get the correct date you are following the quick timeline for the regulations, but that plan never ever be place that single point of contact, talking to somebody, working through, helping them understand what options are and helping to make the right decision for themselves and their family. >> thank you, laurie. >> one comment. i hope people really reflect on a comment that ed demarco made a few minutes ago. which helped us get lost in this conversation which is about the fact that deflecting a modification is one way to think about helping a customer but this is a larger issue and question and opportunity for all of us. people can aspire to pay their loan. people are not sort of fixed in this case they are now, through counseling, a lot of the of the
work that ed talked about the there's an opportunity to change the dynamics. to me people who are not in homes today who should be announced. that's a big piece of the. i just want to acknowledge ed's comment and hope that we all sort of reflect on that. >> add my one observation based on several things. let's not lose sight we been in a very sort of juicy driven and government regulation of driven environment the last eight years in this whole space. there's still value to market and market incentives of credit investors being able to identify efficiencies, getting to the question, given the answer to the question about what our these costs. having a competitive market certainly can also be part of this, part of the future in creating a better force.
>> michael, any last words? >> just follow up on the home buyer education and counseling issue. in this post crisis world we've got and you know was amount of valuable resources in the counselors, and really redeploying those and find a business model that works, that builds homeownership, education and counseling into the front end, and bringing tens of thousands, hundreds of thousands of prequalified low and moderate income borrowers, to lenders to compete for, that should be part of the kind of the bigger . ..