Subprime Servicer Reporting Can Do More for Modification than Government Subsidies
Joseph R. Mason
Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center
March 19, 2009
Recent history is rife with examples of servicer problems and failures, resplendent with detail on best - and worst - practices. The industry has been through profitable highs and predatory lows, over time reacting to increased competition with greater efficiency and, where sensible, increased concentration reflective of scale economies in processing and knowledge.
While the value of good mortgage (and all consumer loan) servicing is reflected in asset- and mortgage-backed security spreads, structurally-required credit enhancements, defaults and roll rates, and modification outcomes, that value lies primarily in processes and knowledge. Servicing is nothing if not a service industry, motivating borrowers to pay the loans under the servicer's own management even when the borrower cannot afford to pay others.
Such processes are the basis of managing initial defaults and getting borrowers back on track, whether that is through managing to roll the borrower back to current organically, or helping the borrower realign their finances in a modification. Even in foreclosure, there is value to be retained within the legal environment, among real estate professionals and vendors, and even with the foreclosed borrower.
But intensively customer service-based enterprises such as servicing are hard to evaluate quantitatively, so that proving a servicer's value is difficult even in the best business environment. Unfortunately, today's is not the best business environment, so proving servicer value has now become crucial to not only servicer survival, but the survival of the market as a whole.
Regulators can therefore do a great service to both the industry and borrowers in today's financial climate by insisting that servicers report adequate information to assess not only the success of major modification initiatives, but also performance overall. The increased investor dependence on third-party servicing that has accompanied securitization necessitates substantial improvements to investor reporting in order to support appropriate administration and, where helpful, modification of consumer loans in both the private and public interest. Without information, even the most highly subsidized modification policies are bound to fail.
Number of Pages in PDF File: 65
Keywords: Subprime mortgage, servicing, modification, securitization
JEL Classification: G21, G23, G28
Date posted: March 18, 2009 ; Last revised: March 23, 2009