As plans for the government's broadened oversight materialize, mortgage servicers are preparing for this new age of compliance. While today's housing market is undoubtedly more challenging for all parties, including investors and consumers, servicers are charged with improving their processes – as well as their images. This is not just about playing by the rules – new legislation requires servicers to make major and immediate changes to their systems and operational processes in order to accommodate more stringent standards.
Some studies estimate that as many as 10 million borrowers are still at risk of defaulting on their mortgages. According to a 2012 report from the Office of the Comptroller of the Currency (OCC), banks still face a large number of delinquent and foreclosed properties. With this in mind, servicers must adapt their businesses to prepare for difficult times on the not-so-distant horizon.
Yet, the industry's overall recovery is in need of more than an instant transformation – it needs sustained change, which can only come from solving issues at their roots. Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), described these core problems as the mortgage servicing market's lack of transparency and lack of accountability.
The road to achieving compliance is not without uphill battles or ongoing controversy. No industry decision will be made without opposition, as that is the nature of the market's current situation. For instance, some individuals believe the $25 billion National Mortgage Settlement and the new Home Affordability Modification Program regulations represent a step toward revitalizing the industry and the reputation of servicers.
However, some consider these simply a bailout for the five large banks named in the National Mortgage Settlement, with no established form of enforcement. Many industry professionals disagree with using taxpayer money to provide investors cash payments of up to $0.63 for every dollar of the loan principal to reduce the balances.
Others are unhappy with the overall tightening of lending restrictions and feel as though the new suitability requirement, telling borrowers they must purchase within their means, illustrates the government's overstepping its boundaries. The goal is to prevent predatory lending, not limit consumers. Some industry experts argue that these types of decisions are already made by the government on behalf of consumers, such as those regulations concerning stocks and bonds; these are simply extensions of that protection.
How can financial institutions make sure they play by the rules, especially when the rules continue changing at an alarming rate? According to Mortgage Bankers Association (MBA) statistics released last year, if a person were to work 24 hours a day, seven days a week for 365 days a year, he or she would manage one policy or regulatory compliance change every two hours and 10 minutes. Imagine keeping up with this rate of regulatory change and remaining 100% compliant while still running a business?
Financial institutions must have technology in place that assists with this effort. Simply having a record-keeping system is no longer adequate. Today, technology is available that not only helps manage a growing number of compliance requirements, but also contributes to servicers' internal efficiencies and cost savings. With the need for greater speed and accuracy, servicers need to achieve more from the technology in which they invest.
To identify the appropriate solution, servicers must have a clear understanding of what today's era of compliance really entails. First, a system must be configurable and able to integrate new, compliant practices into the business' rules and workflow dynamically and on-demand. It should also have the ability to apply these rules retroactively, instead of just adding in new procedures from this point forward.
Second, technology should empower servicers by providing complete visibility into the regulatory landscape. It should deliver notifications and detailed information immediately regarding any regulatory change or update. This allows a company to remain compliant and to avoid process delays, no matter how rapidly regulations are established or modified.
A robust system enables servicers to manage the once seemingly impossible responsibility of remaining compliant and to avoid the imperfect practices and unacceptable record keeping of the past. Flexible, customizable technology allows for the creation of specific rules according to investor guidelines. By providing a forum for multiple parties to collaborate and integrate any necessary data and documentation, servicers have an easy way to provide accurate information and proactively identify any problems.
While a recent OCC report indicated continuing challenges for mortgage servicers, it also stated that banks are in a far stronger financial position than before the recession, with higher levels of capital around the industry, particularly at the largest banks. This first-quarter report pointed to an improvement in the overall quality of serviced mortgages. The percentage of serviced loans that were current and performing at the end of March was 88.9%, the highest level in three years, according to the report.
Cautious optimism seems to be growing within the industry. David H. Stevens, MBA's president and CEO, believes the housing market situation is starting to improve. ‘There are still mistakes being made, but it pales in comparison to what this environment was like in the early part of this housing crisis,’ he says. ‘I think we are clearly on the precipice of that changing.’
Sanjeev Dahiwadkar is president and CEO of IndiSoft LLC, based in Columbia, Md. He can be reached at (410) 730-0667.