Viewpoint: The Battle for Mortgage Banking

House Financial Services Committee chairman Barney Frank (D-MA) held a hearing last Friday that “examined the role of mortgage servicing in the foreclosure crisis, focusing specifically on ongoing problems with loan modifications and the need for improvements in servicing practices and responsiveness to consumers.” At least, that was the published party line. Closer to reality, however, the hearing marked a dramatic shift in the debate over the housing mess — a shift that may well determine what mortgage banking will look like over the next 20 to 30 years. That sort of heavy reality was easy to miss in the lengthy and often hyperbole-laden testimony delivered by various consumer groups, House members, and industry representatives; but read between the lines, and you’ll get an inkling of the suddenly larger stakes now in play for mortgage banking. “Like many, I had not previously understood the critical role mortgage servicers play in the modern mortgage markets, where few loans remain with the financial institution that made them,” said Maxine Waters (D-CA), chairwoman of the House Financial Services Subcommittee on Housing and Community Opportunity. “Regulators failed to put together a decent body of law on making loans during the boom years, so there is no reason to expect that they would think ahead to regulating the sector of the mortgage industry responsible for addressing those loans when things went south. When the crisis hit, it rapidly became clear that the mortgage servicing ‘muscle’ of the industry had largely atrophied.” Short translation: we’re going to regulate servicers. A move to wrest control For all that has changed in the industry, what hasn’t is this utterly immutable point: the very nature of secured lending depends on the ability to value and repossess collateral should a borrower fail to perform. Which, in some ways, makes servicing a loan more critical to mortgage bankers than originating one. It also makes the question of control a critical one; take control out of servicers’ hands, and you may very well have killed secured lending as we know it. Don’t think this point has been lost on various consumer groups, either. “Currently, the servicer has almost, if not all, of the power and control,” said NAACP director Hilary Shelton in his testimony Friday. “There are several proposals currently before Congress to change that dynamic; proposals that the NAACP supports and views as necessary if we are going to offer real help to the millions of American families whose homes are at risk.” Power to the people, as it were. But secured lending is not a social institution, after all. Consumer groups have long argued that government should seek to nationalize mortgage lending in the name of some greater social good — either that, or private lenders should be so heavily regulated by the government that their actions essentially become those of the government. For better or worse, this historic housing mess is now providing that viewpoint a kind of traction it has never enjoyed at any other time in the past 20 years. “Servicers are not obligated to conduct loss mitigation activities or to grant loan modifications to qualified borrowers; in fact, incentives exist for them to avoid these activities,” claimed Janis Bowdley, associate director at the National Council of La Raza, in her testimony. “Processing a loan modification requires complex paperwork, while short sales and foreclosures are easier to process and earn servicers higher fees.” She’s patently and provably wrong, of course — and Bowdley might even know that, given that she provided no evidence in her testimony to back her claim — but her remarks serve a critical purpose: in a war of ideology, facts have always been less important than winning the battle of public perception. This is about control, and nowhere is this battle more readily apparent than in the debate over “affordability.” “Skillful loan servicing can convert distressed mortgages into stable loans that generate revenue for investors, build ownership for families, and contribute to stronger and more stable communities,” said Julia Gordon from the Center from Responsible Lending. “Ineffective or abusive loan servicing, on the other hand, can produce the opposite results.” Blink, and you might have missed the sleight of hand being performed there — servicing is no longer defined in terms of protecting investor interests, as has been the case pretty much as long as the industry has been around. Instead, good loan servicing is being defined as anything that keeps a borrower in their home, while bad loan servicing is being defined as anything that causes the borrower to lose their home. It’s subtle, but very powerful, messaging. And it’s a message that heads straight to the bottom line of any servicer that wants to stay in business. Coming out cringing The Mortgage Bankers Association’s David Kittle testified on the industry’s behalf — and on the surface, his presentation seemed reasonable enough. He talked firmly about how servicers lose money and lots of it whenever a foreclosure takes place, discussed a range of available loss mitigation programs offered by lenders, and talked about how the industry was partnering with consumer groups and other third parties to help borrowers. He laid out the concept of servicing advances, too, but went no further; no mention of how critical the issue is for the industry going forward, no discussion of how servicing spreads are likely to threaten many traditional servicing shops. It got no better when Mary Coffin, EVP at Wells Fargo Home Mortgage, and Michael Gross, loss mitigation head at Bank of America, trotted out the banker’s tired and well-worn message about having a “commitment to the consumer.” Only once across all three testimonies did anyone come close to broaching the subject at hand. “[W]e cannot arbitrarily erase a debt for consumers that they simply cannot afford,” Coffin said at the end of her remarks, sort of in a we-hold-these-truths-to-be-self-evident sort of way. It’s a point that should have been wielded with authority and driven into the skulls of the House members that asked for a hearing on the matter; because it’s the crux of what’s really at stake here. An industry interested in self-preservation should at least be motivated to focus less on distractions around phantom foreclosure profits and instead push towards a discussion of what it’s going to take for many servicers to actually survive this mess. The securitization markets are literally the engine that drive the entire mortgage credit market. Remove the servicer from the equation by making loan servicing a social function, advances will shoot the moon, and we’ll be shoving servicers off of the proverbial ledge in droves — and I don’t care if we’re talking about agency or private-party loans; you’ll see investors knocked off their level in both cases. Right now, we’re being sold a package of goods that says forcing servicers to rewrite loans to “affordability criteria” is not only a good thing for homeowners, but for investors, too. It’s a short term selling strategy, because the hidden truth is that none of the current rhetoric is rooted in any sort of real concern for investors or the secondary mortgage markets; instead, it’s rooted in the desire to establish a referendum on the role servicers should be allowed to play going forward. Make no mistake about it: this battle is now about nothing less than the very existence of the modern mortgage market, and all of the trillions of dollars that go with it. Editor’s note: Paul Jackson is the publisher of HousingWire.