Servicing Costs Rise Despite Lower Delinquencies, Reversing Longtime Pattern

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DALLAS Delinquencies no longer have as much bearing on servicing costs as they once did.

Annual delinquency rates of 90 days or more peaked around 4.5% in 2009 and have generally trended downward, hitting 2.5% last year.

However, direct servicing costs at an estimated $170 per loan in 2014 have largely risen since falling to a low of $55 per loan in 2007. Costs were just $89 per loan in 2009 when delinquencies peaked.

“Historically, the delinquency rate has played a huge role in the cost to service. It still does, but there are other elements,” Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association, said during the group’s servicing conference.

The Mortgage Bankers Association and Stratmor Group estimate servicing costs dropped year over year by about $35 in 2014, but factors such as new regulatory developments that increase compliance and related operational burdens could change that in 2015, Walsh said.

Default as of 2014 accounted for an estimated 51% of direct servicing costs in 2014, executive management and specialized functions in 2014 represented 13% in 2014, and servicing technology accounted for 10%. Another 10% of costs came from customer service efforts.

“There’s more of a focus now around the customer service,” Kevin Wall, president of industry vendor First American Mortgage Solutions, said in an interview.

Payoffs and transfers only represented 2% of costs last year, but with increased regulatory scrutiny and compliance burdens related to transfers growing that percentage could increase, Walsh said. New loan setup, cashiering, escrow and investor reporting account for the remaining direct servicing costs.

While costs and compliance are a challenge for servicers, a rise in delinquencies is one thing they probably do not have to worry too much about, according to MBA researchers.

Delinquencies were down in the fourth-quarter numbers released at the conference.

“We definitely believe mortgage performance will improve further,” Walsh said.

While this could be a concern for distressed servicing specialists, it is helpful for servicers in general.

Distressed loans are by no means out of the picture yet, Walsh said.

“We still have to work through some of the inventory,” she said.

Credit availability has loosened somewhat recently, a trend that can lead to loan performance difficulties down the road. However, the loosening is very slight to date, and the market is still far from credit availability levels that proved problematic in the past.

Currently the credit availability index is 117. In 2004, just before the market boom in lending that led to the last downturn, it was 880, said Lynn Fisher, vice president of research and economics at the MBA.

“No one’s arguing we want to go back to those days,” Fisher said. The gap in the index values for 2004 compared with 2014 shows there is considerable room for credit to expand before it be becomes a large performance concern, she said.

Delinquencies have less to do with costs than they did, but they may still have enough bearing on expenses to limit credit expansion, according to a recent Urban Institute study.

Servicing for a defaulted loan cost an estimated $2,357 in 2014 compared with $134 for a performing loan, according to the MBA and Stratmor. Back in 2008 default costs per loan were closer to $400 and they have generally been rising since that time.

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