New York State taking a closer look at non-bank servicers
by. Henry Meier
Benjamin Lawsky, Superintendent of New York’s Department of Financial Services, used a speech before the Mortgage Bankers Association’s Secondary Market Conference in New York City yesterday to highlight the DFS’s concerns with the outsourcing of mortgage servicing rights to nonbank servicers and the impact that this trend could be having on the quality of consumer services.
According to the Superintendent, larger banks are getting out of the mortgage servicing business in part because of new capital requirements. (Let’s also keep in mind that servicing just may not be worth the headache for these banks following multi-billion dollar legal settlements related to their servicing and foreclosure practices).
What harm is New York State witnessing as a result of this trend of selling mortgage servicing rights? “One of the things we’re concerned about as a regulator is whether these MSR sales trigger a race to the bottom that puts homeowners at risk. Remember, in most cases, the compensation to be paid for servicing is fixed by the PSA; it cannot be diminished. So the cheaper a servicer can service those mortgages, the more profit it expects to earn from the fixed servicing fees, and the more it can offer the banks to buy these MSRs,” Lawsky said. He went on to explain that “it should be no surprise that borrowers tend to be the losers here. When we at DFS take a closer look at some of these non-bank servicers, we find corners being cut to the disadvantage of homeowners.”
New York is particularly concerned about the growth of fee based a-la-carte services whereby servicers or their affiliates provide a consumer with fee based services such as assisting in short-sales and inspecting property. While the Superintendent stressed that there is nothing inherently wrong with add-on services, given the close relationship that many of the service providers have with the companies providing the mortgage servicing and the fact that a typical consumer does not widely shop for such services, the DFS sees the potential for higher costs and conflicts of interest.
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