The attempt by legislatures in Washington to push banks out of the mortgage servicing industry is driving investors and other non-bank financial firms to move towards lending.
Numerous banks such as Morgan Stanley, Bank of America, Goldman Sachs and Ally Financial have steadily been selling off their rights to the mortgage servicing sector. Approximately $1 trillion dollars worth of assets were sold off in 2013, and most of that money went to non-banks. However, the number of non-bank institutions servicing loans is still relatively small. It accounts for 17% of the market in 2013 which is up from 9% in 2012.
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There Is Money to Be Made
The mortgage service industry, like the financial services industry, can be very lucrative. Servicers make money through collecting a fee from the financial institution that services the loan. The ten largest mortgage lenders in the United States took in approximately $8.23 billion worth of servicing income in 2013.
This leads to one rather obvious question. With all this money being made, why would banks step away from the potential profits of mortgage servicing? The answer is that servicing loans has in some cases become somewhat of a liability for lenders. And more importantly, the banks are being forced out.
“This whole business was obliterated by the government, and there’s a lot of money in it,” said Rael Gorelick, partner at Gorelick Brothers Capital LLC, Charlotte, N.C., which invests in hedge funds and other assets with exposure to U.S. housing markets. Mr. Gorelick beleives that hedge fund investors will be incentivized to help people stay in their home because borrowers who can make payments are more profitable than those who must go into default. This leads one to wonder, what business could remain profitable in the event that its borrowers became unable to make their payments? Perhaps it is only a business that receives a golden parachute in the form of a bailout.
Why Banks Are Playing A Smaller Role
After the financial crisis, Washington began to pass new laws that were designed to help move risk away from banking institutions. There was a growing belief that banks had handled crisis era loans poorly and didn’t follow the right safeguards when handing out risky loans. Because of this a new set of lending rules were put in place which determined how servicers could interact with borrowers.
With banks now playing a smaller role that they have in the past, there is concern about the level of oversight that these non-banking institutions have. Some non-banking firms have already run into a bit of trouble. Ocwen Financial Group reached a $2.1 billion dollar settlement with the Consumer Financial Protection Bureau over charges that it instituted unauthorized fees and failed to properly credit some borrower’s accounts. These accusations have neither been confirmed nor denied by Ocwen.
For the most part there doesn’t seem to be any major implications for the average person who is thinking about taking out a loan. Apart from the change of ownership, buying or refinancing a home from one of these non-banking institutions will still be conducted in the exact same manner. These institutions still have to be compliant with Dodd-Frank and other regulations just like any other bank.
