Mortgage servicers face lower revenue

14 June 2010

Boy, have I got some interesting news for all you Europeans - Americans now owe $9.8trillion on their mortgages compared with $10.1trillion at the end of last year. So what’s the big deal? Well, for starters this is the first time in decades the number has fallen on a sequential basis.

The figure, courtesy of my US publication National Mortgage News, shows that consumers over here are doing what financial experts across the land have been urging us to do for years, namely reduce our debt.

The $9.8trillion figure includes both first and second mortgages. If only a few European nations - not to mention the US itself - could take inspiration from this amazing story of debt reduction.

So it’s true that Americans have whittled down their mortgage bills by 3% but there’s more to the story than meets the eye. The lower balance owed isn’t a stunning surprise when you bear in mind that millions of homes have entered foreclosure the past two years.

When mortgage bankers finally take title to delinquent properties, clean them up and place them back on the market the new sales price is lower than the old one - in some cases much lower. This effectively reduces the outstanding mortgage bill for consumers.

But there’s also a dark side to the story, at least for lenders that process or service mortgages on a monthly basis. The lower the dollar amount owed to the bank, the less money mortgage bankers can earn from servicing these loans.

Americans with readily available cash are choosing to pay off their mortgages at an accelerated pace

“The numbers are definitely declining,” says Jay Brinkmann, chief economist at the Mortgage Bankers Association.

The trade group tracks mortgage debt in a different way from National Mortgage News but its findings are similar - consumers have reduced their residential debt load.

Brinkmann is quick to point out that the last $2trillion increase in mortgage debt - that is, servicing rights - was achieved in just two years.

“Before that it took three years to grow it by $2trillion, before that four years, before that 10 years and before that 37 years,” he says.

It’s no secret why mortgage debt grew so rapidly the past decade. Cash-out refinancing allowed consumers to use their home equity like an ATM, withdrawing money based on what proved to be inflated values.

But it’s not only lower values driving down servicing balances. Apparently, more Americans - those with readily available cash, that is - are choosing to pay off their mortgages at an accelerated pace.

“There’s a lack of good investment options,” Brinkmann says. “Where are you going to put your money? If you put it in treasury bills you’ll only earn pennies. Stocks? No. It’s better to pay down your loan.”

As I noted earlier, all this talk of a lower debt load appears to be a positive for the personal balance sheets of Americans but for residential servicers that earn their keep processing millions of mortgages each month it’s a dicey proposition.

The typical Fannie Mae or Freddie Mac loan pays an average servicing fee of 0.23%. Mortgages that go into Government National Mortgage Association mortgage-backed securities carry a 0.44% servicing fee. If a servicer’s receivables fall, so does its net income.

“I think this trend will continue for five or six more quarters,” says one mortgage insurance executive who’s been in the business for around 20 years.

The executive, who didn’t want his name published, concedes that lower mortgage balances can translate into weaker mortgage insurance revenue. But slower home equity growth also means LTVs will not fall much and consumers will be unable to cancel their mortgage insurance policies. Falling mortgage debt is probably the main reason some of the nation’s top servicers saw declines in their servicing portfolios in Q1 2010. Seven of the top 20 servicers experienced a fall in receivables compared with the same quarter a year previously.

The country’s top two servicers - Bank of America and Wells Fargo which have a combined market share just shy of 40% - had anaemic growth of 2% each.

In Q1 2008, right before the housing bubble burst in spectacular fashion, Bank of America grew its servicing portfolio 22% while Wells’ servicing growth was a modest 8%. In that quarter just two servicers in the top 20 had negative growth - the rest showed gains.

It’s assumed that the steepest declines in home values are behind us which means most mega-servicers probably aren’t all that worried about anaemic growth numbers on loan balances.

Then again, they might be but they’re not about to admit as much publicly because it’s tantamount to acknowledging that profits will skid.
Gordon Albrecht, executive vice-president of California-based specialist servicer FCI Lender Services, believes that when it comes to home values “the worst of the damage is already done - what lies ahead won’t be so bad”.

The mortgage servicing industry is hoping he’s right.

Paul Muolo is executive editor of National Mortgage News

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat