Converging Pressures in Mortgage Servicing: Driving the Need for Records Management Improvements
The mortgage servicing industry is under intense pressure on multiple fronts. An entirely new regulatory apparatus has been put in place after weaknesses were exposed during the housing collapse, and servicers are being held to strict standards that require impeccable records management practices. Meanwhile, with revenue sagging along with originations volume, servicers have to keep a close eye on costs and efficiency. Meanwhile, with revenue sagging along with originations volume, servicers have to keep a close eye on costs and efficiency.
An online survey of senior servicing executives conducted in September 2014 by the research unit of SourceMedia—publisher of National Mortgage news—on behalf of Iron Mountain shows an industry transformed by these forces. Instead of the uninhibited velocity that was the hallmark of the bubble years, servicers are paying close attention to not only regulators but everything else from data security and customer service to the nittygritty of trailing documents.
With servicing on hundreds of billions in mortgages changing hands every year—propelled in part by capital rules that are leading to divestures by banks—executives report considerable gaps in priorities and capabilities in records management whether selling the servicing, purchasing the servicing, or originating loans and keeping servicing rights. Under the new regulatory regime, it is not possible to let documents standards slip wherever an institution is in the servicing chain.
While the industry has become more focused on and concerned with records management throughout the life of a mortgage, respondents suggest that technology is still in the middle of an evolution. Large fractions of companies continue to manually index digitized files, for instance, and concerns about regulation can both be a motive for and barrier to changes in practices.
- With the advent of the Consumer Financial Protection Bureau (CFPB)—created with the Dodd-Frank Act, endowed with responsibility to oversee servicing—servicing executives reported the adoption of an “all of the above” mentality in prioritizing the importance of a host of document management issues. However, respondents’ “capability scores” (derived from the inverse of self-reported “difficulty ratings” in addressing document management issues), highlight areas that demand more work and attention. Such capability gaps for important initiatives vary depending on whether the institution has retained, acquired, or transferred the servicing of the loan. Priorities and gaps between them and capabilities vary depending on whether the institution retained, acquired, or transferred the servicing. For example:
- For lenders retaining the servicing of their originations, regulatory compliance topped the list of their priorities with a mean importance rating of 6.6 (out of 7) followed by data security and data accuracy (each rated at 6.5), and the ability to respond to audit trails (6.3). Document management capability ratings show management of third-party vendors as the lowest-scoring capability at 2.7 (out of 7). However, the largest gap between importance and capability is regulatory/legal compliance with a capability score of 2.8, highlighting the need for improvements on this highest priority issue.
- For institutions purchasing or acquiring the servicing from other firms, data security is their highest priority (6.4) with a low capability rating score of 2.4, suggesting the need for improvement in this area. Missing documents scored as the lowest of all capabilities at 2.2 for these institutions—representing a large gap when comparing the importance versus the difficulty of dealing with this issue.
- For institutions transferring or selling the servicing to other firms, data security importance rated the highest at 6.6. However, a low capability score of 2.0 for data security illustrates a large gap and cause for concern for these institutions. Additionally, the regulatory scrutiny of sellers’ responsibilities presents compliance/legal risks and difficult challenges as illustrated by the lowest capability score of 1.9 for servicer compliance/legal risk issues.
- Technology used in document management is still evolving. Manual indexing of digitized files was slightly more prevalent with 39% of all respondent using this technology compared to 31% using optical character recognition (OCR) software. However, slightly different levels of accuracy rates are being achieved by these technologies—47% of those using manual indexing report this method as “very accurate” while 52% of those using OCR software reported achieving the highest accuracy levels.
- Just over half of respondents said their companies used document preparation software (53%) and electronic document management systems (51%).
- Nearly two out of three executives named regulatory compliance as the top criteria for influencing their choice of an outsourced document preparation software or electronic document management system. Improving productivity, as mentioned by 44% of respondents, was the next most popular driver of their outsourcing decision for these types of software.
A High Velocity Marketplace Encounters Friction
Driven by new capital standards and bruises from servicing breakdowns after the housing crash, servicing rights on hundreds of billions in mortgages have changed hands in the last few years. Figure 1 (In PDF) shows the perspective on volumes at respondent institutions.
Much of the volume represents divestures from banks to the nonbank servicing troika of Nationstar, Ocwen Financial, and Walter Investment, as banks adapt to Basel III rules that assign high-risk weights to servicing rights and make holdings of MSRs valued at more than 10% of Tier 1 common equity particularly costly. Flows to bank acquirers have been smaller but still substantial in some cases as banks maintain a funding advantage over nonbank competitors in the form of cheap deposits. This is particularly true for portfolios with relatively few delinquencies where there is more to fund (valuations on servicing rights are generally higher when the costs of servicing are generally lower).
These massive handoffs have encountered substantial friction. Some large-volume acquirers have acknowledged delays in digesting their purchases and newly empowered regulators have intervened. A sale of servicing rights on about $40 billion of mortgages from a major lender has been held up since February because of concerns registered by regulators, for instance.