The Role of Mortgage
Servicers in the
Subprime Mortgage
Crisis
Breck Robinson
University of Delaware
Mortgage Servicer Market Concentration
80%
70%
60%
50%
Top 25
Top 5
40%
30%
20%
10%
0%
Source: Inside Mortgage Finance
1989
1994
2000
2004
2007
The Role of Mortgage Servicers







Bill and collect payments and fees from mortgage
holders
Monitor non-discretionary payments (e.g. taxes,
insurance)
Manage delinquencies to minimize losses and maximize
asset recoveries, acting as the agent of the trustee
Manage mortgage insurance recoveries, if applicable
Advances on delinquent loans
Remit payments to trustee
Provide required information to trustees/investors
regarding the performance of asset pools
Sources of Revenue

Annual fee based on the $ amount of mortgages serviced





Fixed-rate prime loans = 25 basis points
Prime ARMs = 37.5 basis points
GSE sponsored mortgage pools = 44 basis points
Subprime loans = 50 basis points
Fees structure of the following:

Type of mortgage product



Typical loan size
Reporting requirements
Resource commitment

Float

Other Fees

Can be a significant source of revenue
Sources of Costs

Labor
 Loss mitigation
 Costs not associated with foreclosure may not be reimbursed

$600 to $1,000 to modify loans

Advancing delinquent payments

Financing costs on delinquent payments
 Current environment may be expensive
Types of Loss Mitigation

Maturity extension:


May increase the maturity of the mortgage by up to 10 years.
Deferring or forgiving missed payments:

Missed payments can be rolled into the principal portion of the loan and
the monthly mortgage payment can be adjusted to reflect the larger
principal amount


Missed payments can be treated as a separate monthly payment that
must be repaid in addition to the original monthly mortgage payment


Time period for repayment is over a shorter period of time.
Principal reduction:


Or
Reduction of the actual loan amount to be repaid by the borrower.
Interest rate freeze or reduction
Types of Loss Mitigation

Short sale:


Short refinance:


Allows the lender to reduce the amount the borrower owes on
the home so that the borrower can sell the home without taking a
significant loss
Lender is willing to take a loss on the loan by reducing the
outstanding balance of the loan in order to help the borrower
refinance with a new lender
Deed in lieu of foreclosure:

Lender may be willing to accept the deed to the home and
bypass the foreclosure process, if exchange the borrower would
be released from all obligations under the mortgage

Cash-for-keys negotiation
Why is it difficult to modify
mortgages?

Compensation structure for servicers

Revenue is a percentage of assets serviced


25 to 50 basis points + fees collected from borrower
 Ex: late fees
Foreclosure may maximize the discounted
value of the cash flows for investors

It has been estimated that 40% to 60% of modified
mortgages will eventual default

Investor may be worse off after a loan is modified
Why is it difficult to modify
mortgages?

Expenses are mainly labor


Modifications are very labor intensive and costs may not be
reimbursed in full
PSAs may restrict the ability of servicers to modify
mortgages

At best, PSAs provide little guidance in how to modify
mortgages


Potential litigation risk
Lenders that have the second loan on the property have
no incentive to accept a loan modification
Subprime Mortgages Originated
with Second Loans
35.00%
30.00%
25.00%
20.00%
Variable rate (2/28)
Fixed rate
15.00%
10.00%
5.00%
0.00%
2002
2003
2004
2005
2006
2007