In the wake of the financial crisis and still in the midst of the foreclosure mess, the Consumer Financial Protection Bureauannounced new rules for mortgage servicers designed to protect borrowers and get them faster, more effective and informative service.
The proposed changes by the CFPB would require servicers to consider applications for help from troubled borrowers within 30 days of receiving them. Meanwhile, servicers would not be allowed to proceed with a foreclosure until the decision on a potential modification has been made.
The new rules would apply to all mortgage servicers, not just the nation’s five largest banks that earlier this year agreed to a $25 billion settlement in the wake of the “robo-signing” paperwork scandal.
The new guidelines present new challenges to mortgage servicers — especially big banks already overwhelmed with delinquent loans.
“There’s a finite amount of capacity in the servicing enterprise today, and the system by design was never set up to withstand these rates of delinquency, these high rates of foreclosure for an extended and protracted period of time which is where we’re at right now,” said Edward Delgado, COO of Wingspan Portfolio Advisors, a Texas-based specialty servicer.
That is why many institutions are increasingly farming out servicing, or directly selling the loans to so-called specialty servicers. These entities, which number about two dozen, often have more experience and resources to deal with troubled loans.
Despite improvements in the overall mortgage markets, 5.8 million loans — or 11.9 percent of all residential U.S. mortgages — were either delinquent or in the foreclosure process at the end of June, according to Mortgage Bankers Associationdata. Mortgage delinquencies increased in the second quarter of this year, reversing a trend of fairly steady drops in the rate.
The bureau's new policy "amplifies our role as a strategic partner in the prevention of foreclosures for the most part, by enhancing our outreach to homeowners and working closely with the banks to make contact,” said Delgado. He said his company works with smaller pools of troubled loans and can therefore conduct consumer outreach more effectively, even go door-to-door.
Just last week CitiMortgage announced it is selling $158 million worth of mortgagesto special servicer Carrington Capital, which will conduct a deed-for-lease program. That’s where troubled borrowers turn over ownership of the home to Carrington and then can rent the home back if they choose, sidestepping a more costly and credit-crushing foreclosure.
“As a financial institution, managing a program of this nature is not within our area of expertise, so we joined with Carrington, one of the best property management companies in the country, to help make this program work,” said Sanjiv Das, CEO of CitiMortgage in a release.
Insiders at Carrington said they expect to see more deals like Citi's, saying federal regulators are actually pushing larger banks to offload bad loans. The larger firms simply don’t have the capacity to handle the large volume of delinquent loans, made abundantly clear in hundreds of stories from frustrated borrowers who face foreclosure. They tell of lost documents, impersonal service and constant runaround.
Now specialty servicers stand to gain more business; publicly traded servicers like Nationstar, Ocwen , Walter Investment Management may be good bets for investors, as the foreclosure crisis plods on.
“The further we go into the crisis — the addition layers of regulatory oversight, the complexity of various programs that are being engaged — the more that the larger banks will presume a position of being a master servicer maintaining control and oversight of key functions," said Wingspan's Delgado. He added the role of special servicer would "continue to expand across the marketplace.”
—By CNBC's Diana Olick