Mortgage servicing has undergone a dramatic transformation in response to the housing crisis. The business practices and new regulations shaping this transformation fundamentally changed how servicers interact with borrowers by requiring extensive loss mitigation options to ensure that servicers exhaust all options before moving forward with foreclosing on a borrower.
Going forward, a focus on the consumer will define how servicers approach their business and regulators oversee their operations.
"We've had standard assistance programs for customers before, like repayment plans and forbearance," said Janice Kay "JK" Huey, senior vice president of foreclosure and asset management at Wells Fargo.
"But then as more loans were starting to go into default, we saw Treasury get involved in helping us develop, as well as Fannie and Freddie and HUD, their own programs," she continued. "They wanted to make sure we were doing all that we could to help customers stay in their homes."
"Twenty years from now, we'll probably go through another two or three cycles," Huey said.
The challenge, Huey said, lies in maintaining underwriting standards that adequately protect lenders and investors from unnecessary risks without being so restrictive that consumer can't qualify for loans.
"What we've tended to see, particularly over the last 10 or 12 years, is when you get too tight, then you get too lax. How do we find the right balance to make sure that there's steadiness in the market?" Huey said.
The regulatory response to the subprime mortgage crisis has been markedly different from the actions that regulators took in the wake of the savings and loan crisis in the late 1980s and early 1990s.
"I'd say definitely there was more of a consumer focus this time," said Huey, a 35-year veteran of the mortgage industry, who experienced both crises firsthand.
"In the S&L crisis, regulators were just making sure they liquidated the S&L and sold off the mortgage operation. You didn't see the focus on the consumer as much as what was the S&L doing and was it able to survive," said Huey, a native of Texas, where the S&L crisis hit the hardest.
"In this case, while there were takeovers of the banks, in some cases, to ensure that they had the assets to support the liabilities, regulators were then focused on what caused this and what's going on in the mortgage side of the business that could have caused the demise of the bank."
This difference is perhaps best exemplified by the formation of the Consumer Financial Protection Bureau and the wide-reaching effect that the agency has had on monitoring
"While we've been a very regulated industry, especially on the banking side, there became a lot more regulatory focus on what servicers and lenders were doing," in response to the subprime crisis, Huey said.
Because banks were already subject to Office of the Comptroller of the Currency regulation, the adjustment to CFPB oversight was different for nonbanks in the mortgage industry.
"That was something new I think for nonbanks, and CFPB is very engaged in looking at shops to make sure that we're doing what's right for the consumer," Huey said.
While the volume of new defaults and backlog of foreclosures are both in decline, the regulatory focus on consumers is also present on the local level, as servicers work with county and municipal governments to address concerns about neighborhood blight stemming from foreclosed and vacant properties.
"The volumes are starting to come down and a lot of the focus that you're seeing now is working on how do we help restabilize those communities?" Huey said.
As housing market and overall economic conditions continue to improve, the servicing sector will go through another transition. Years of historically low interest rates may help keep borrowers from refinancing current loans. But as existing borrowers buy new homes and new consumers enter the mortgage market, portfolio retention strategies and adapting offerings to meet the demands of younger generations will be crucial.
"You need to market on the ability to provide the tools to meet the demands of the consumer and what they want today," said Huey. And through all of those changes, Huey expects regulators will continue to maintain their focus on consumers.
"I don't think we'll ever see less regulation," said Huey. "There's going to be so much focus on making sure that what we're doing is right for the consumer. Who can argue with that?"
