February 12, 2014
Contact: Matt Anderson, 212-709-1691
EXCERPTS FROM SUPERINTENDENT LAWSKY’S REMARKS ON NON-BANK MORTGAGE SERVICING IN NEW YORK CITY
Benjamin M. Lawsky, Superintendent of Financial Services for the State of New York, is delivering remarks today at the New York Bankers Association Annual Meeting and Economic Forum in New York City.
The following are excerpts from Superintendent Lawsky's remarks on non-bank mortgage servicing as prepared for delivery.
Excerpts from Superintendent Lawsky’s Remarks at the New York Bankers Association Annual Meeting and Economic Forum
February 12, 2014
As Prepared for Delivery
Let me start by addressing what we view as a troubling trend in the mortgage industry – the rapid and dramatic growth of so-called “non-bank mortgage servicers.”
In recent years, non-bank mortgage servicers have exploded onto the scene. In 2011, all of the ten largest mortgage servicers were traditional banks. Today, four of the top ten are non-banks.
And those four non-bank firms alone service more than a trillion dollars of loans – 10 percent of the residential mortgage market, and climbing.
At the same time, the loans that those non-bank companies service are disproportionately distressed. And behind each distressed loan is a homeowner or family struggling to make ends meet.
The chief reasons for this evolution in mortgage servicing are well known. Regulators are – appropriately, in the wake of the crisis – putting in place stronger capital requirements for big banks. In particular, they are giving those banks less credit for the (often-distressed) mortgage-servicing rights (MSRs) on their balance sheets.
Rather than building up stronger capital buffers in response, many large banks are instead offloading those MSRs to non-bank mortgage servicers – which are often more lightly regulated.
Non-bank servicers see a tremendous business opportunity in this regulatory arbitrage, and are moving quickly to gobble up distressed MSRs.
But the problems associated with these distressed loans – including homeowners behind on their payments or facing foreclosure – do not just disappear when the big bank sells the servicing rights. Those issues remain when they arrive on the doorstep of a non-bank firm.
We – both state regulators and the regulated servicers – need to make sure that these MSR transfers do not put homeowners at undue risk. We have a vital responsibility to protect consumers.
There are real people at the other ends of these loans, and the ability to work with those homeowners is not something that these non-bank firms can build up overnight.
Indeed, we have serious concerns that some of these non-bank mortgage servicers are getting too big, too fast.
The servicers advertise themselves as having scalable technology to grow with their business, and I’m as big a proponent of technology as anyone. But technology alone does not keep a family in its home.
People lead complicated lives, and helping them work through their issues often requires creative solutions. It is human capital – people – that help families keep their homes. And human beings are not as readily scalable as the technology that supposedly supports them.
A public SEC document that one of these non-bank servicers filed recently starkly illustrates some of these issues. And it makes for startling reading.
In the space of about a single year, that company had nearly quadrupled in size, and now services more than $400 billion in loans. (That’s billions with a “B.”)
In the next 2-3 years alone, that company said it sees opportunities for as much as a trillion dollars in additional servicing growth. (That’s trillion with a “T.”)
Indeed, the company boasted to investors that we’re still “in the middle innings” of cleaning up the human wreckage left by the mortgage meltdown. So, I suppose, the sky's the limit.
At the same time as it touted its growth potential, the company also asserted that it can service those distressed loans at much lower cost – 70 percent lower, in fact – than the rest of the industry.
That’s not a typo. They said they could service those loans at a 70 percent discount.
Now – if someone told you they could get you a 70 percent discount on something like a cell phone or a car – your first thought might be, “That’s probably too good to be true.” And you may have a few follow up questions. Like whether the car has an engine.
So when it comes to something as important as a family’s home, those kinds of cost-saving claims bear special scrutiny. Regulators have to ask whether the purported “efficiencies” at non-bank mortgage servicers are too good to be true.
Indeed, as regulators, when we see such rapid growth, and when we see regulated institutions boasting that they can perform services at a fraction of their prior cost, it raises red flags. It causes us to take a closer look.
And when we take that closer look at the non-bank mortgage servicing industry, we see corners being cut.
We see electronic loan files strewn around the globe with no one who knows how to pull them together.
We see a virtual potpourri of computer systems containing critical borrower information, but no one who knows how to extract that information at the right time and for the right purpose.
And, as a result of those cut corners, we are seeing far too many struggling homeowners getting caught in a vortex of lost paperwork, unexplained fees, and avoidable foreclosures.
To be clear, our concerns are not solely related to the ability of non-bank firms to take on new loans. Our worries run much deeper than that. For some firms, we have concerns about their capacity to handle their current servicing load without violating the law or homeowners’ rights.
Rather than solely treating the symptoms of these problems through after-the-fact fines and enforcement actions – we also need to ask ourselves some deeper questions as regulators.
Among them, how do we address the underlying problem itself?
I think it is appropriate for regulators – where warranted – to halt the explosive growth in the non-bank mortgage servicing industry before more homeowners get hurt.
This is not to say that specialty servicers with expertise in dealing with distressed loans do not have a place in the financial markets. If they can dedicate the necessary time and attention to individual loans – they may be a very good thing.
But regulators should not just be rubber stamps. And if they have serious questions about a company's ability to deal with those loans without hurting homeowners – they should act.
This is an extraordinarily challenging issue that the Department of Financial Services – as well as other regulators – must confront. And it’s something you should expect to hear more about from us in the weeks and months ahead.