Mortgage servicers face higher costs from transfers and regulation

The cost to service mortgages is rising for reasons that extend beyond a recent increase in borrower delinquencies. That’s according to Erik Eggers, chief revenue officer at Rocktop Technologies, who said that regulatory requirements and industry consolidation are fundamentally changing the economics of mortgage servicing.

Speaking with HousingWire, Eggers said that servicing costs have traditionally risen during periods of elevated defaults. But today’s environment is different, with structural pressures increasing expenses regardless of loan performance.

“The burden on servicers has simply gotten heavier over time,” Eggers said. “It’s not a challenge that you can outhire to solve. These structural changes and this increased workload, it is definitely not a performance issue. When you think historically of the rising cost of servicing, you typically think that it comes in connection with delinquency, and that is certainly the case. But these other costs that I’ve enumerated, they’re there regardless of delinquency.”

Servicers face growing compliance obligations while managing an increasing number of servicing transfers driven by industry consolidation. Each transfer requires heavy lifting from servicers to validate large volumes of loan data and supporting documents before they can confidently administer the loans.

These transfers, Eggers said, often include thousands of pages of documents, payment histories and servicing notes that must be reconciled with the data loaded into a servicer’s system of record.

Those issues can become especially costly if a borrower later enters bankruptcy or foreclosure. Missing documentation or inaccurate loan data can delay legal proceedings, increase expenses and create regulatory risk.

“That upfront work really pays dividends down the road,” Eggers said. “If something happens where a borrower gets into a situation where they can no longer afford the property, the servicer needs to be prepared to go through the necessary default processes. … That is one of the hidden costs that no one really talks about.”

Eggers described the current market as a “K-shaped” recovery.

The upside of the “K” is that conventional mortgages backed by Fannie Mae and Freddie Mac continue to perform well, supported by borrowers with stronger credit profiles and significant home equity. But on the downside, borrowers with Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Department of Agriculture (USDA) loans have experienced higher delinquency rates because they generally entered homeownership with smaller down payments and less financial cushion.

“The servicers today need to ensure that they are prepared for the wave of defaults that may be coming,” Eggers said. “And because of that bifurcated market, it doesn’t seem like it is going to come with the same stress that we experienced during the credit crisis, but if you look at the broader economy … borrowers are feeling the impacts of inflation as well.”

Although foreclosure activity has increased this year, Eggers said there’s little reason to sound the alarm. Today’s market differs significantly from the 2008 housing crisis because most homeowners still have substantial equity.

“I think it might be more tumultuous at the margins,” he said. “I think it will largely be contained because of that bifurcated story and because of equity that borrowers have in their homes.”