Has RESPA’s Servicer Rule Reduced Foreclosures?

News

In accordance with requirements of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, the Consumer Financial Protection
Bureau (CFPB) recently conducted five-year assessments of two rules it
promulgated under the act.  We summarized
their assessment of the Ability-to-Repay/Qualified Mortgage rule last week.  What follows is a brief summary of the assessment
of the Real Estate Settlement Procedures Act’s (RESPA’s) servicing rule.

Many provisions of the rule relate to servicer
obligations to review delinquent borrowers for foreclosure avoidance options
such as loss mitigation.  These include
requiring servicers to make certain disclosures, take certain procedural steps,
and meet prescribed timelines when borrowers are applying for and being
evaluated for these options.

The data showed that loans becoming delinquent were
less likely to proceed to a foreclosure sale during the months after the rule
was implemented (January 2014) than before that date.  The Bureau estimates that if the rule had not
gone into effect in 2014, at least 26,000 additional borrowers who became
delinquent that year would have experienced foreclosure within three years.

After controlling for certain observable factors, the
assessment found that loans were more likely to recover from delinquency
following the Rule’s effective date. They estimate that at least 127,000 fewer
borrowers would have would have recovered within three years of a 2014
delinquency.

Data from a trade association survey of large mortgage
servicers found that the cost of servicing mortgage loans increased
substantially between 2008 and 2013
, from about $60 per loan per year to about
$160 in 2013 and remained between $160 and $180 from 2014 to 2017. The
estimated annual cost of servicing a loan in default went from about $480 per
loan in 2008 to about $2,410 in 2013 and remained between $2000 and $2,400 from
2014 to 2017.

While most of the increases occurred before the Rule’s
effective date, between 2009 and 2012 litigation and investor policies imposed
many new servicing requirements similar to those in the Rule. Some of the
pre-2014 increases could reflect the costs of complying with those earlier
requirements.

In interviews servicers said one-time costs of
implementing the Rule (including technology and personnel costs) ranged between
$1 and $14 per loan. If this range is applied to the approximately 53 million
loans under service in 2014, the one-time costs to industry ranged from $53 to
$743 million.  As previously noted, some
servicers had already been subject to similar servicing standards which may
have reduced their cost of compliance.

Some servicers said they had significant ongoing
compliance costs.  Larger servicers
estimated that the Rule had increased annual costs by $3 to $11 per loan.
  For context, industry estimates of average
annual servicing costs since 2014 are $250 to $300 per loan.   If
estimates of on-going servicing costs are applied to the servicing universe it
would result in total additional costs of $156 to $572 million. Smaller
servicers generally said they were unable to estimate cost impacts of the Rule
but that the Rule’s requirements were consistent with their practices prior to
its existence. Servicers identified as cost drivers the need for more robust
control functions and higher personal costs to support increased communication
with borrowers.

Asked about the Rule’s early intervention provisions,
servicer generally said they were consistent with prior practices and did not
require substantial changes other than tracking and monitoring compliance.  The Bureau did not identify specific costs.
There also seemed to be little change in the timing of required borrower
notification although the share of borrowers initiating a loss mitigation
application within six months of a 60-day delinquency increased from 39 percent
in 2012 to 43 percent in 2015.

It did appear
that it took borrowers longer post-Rule to go from initiating a loss-mitigation
application to completing it. This may be because the Rule required servicers
to define a complete application as a more comprehensive package than servicers
used pre-Rule. None-the-less, borrowers who submitted complete applications in
2015 did so at a similar stage of delinquency as borrowers in 2012.

Many servicers said the most significant and costly
changes
they made were to comply with requirement to provide a five-day
acknowledgment notice for loss mitigation applications, to evaluate borrowers for
all available options at the same time, and provide a decision letter regarding
the outcome of those evaluations. These were the requirements that differed
most significantly from prior practices.

Both the time from initiation of application to short-sale
offer increased post rule, likely due to the additional time required to
collect documents
necessary for the all-options evaluation.  It might also reflect an increase in the
length of short-sale marketing periods.

A larger share of borrowers appealed the servicers
decision regarding their loss mitigation applications in 2015 than in 2012 but
the portion of successful appeals declined.

The provision that prohibited servicers from
initiating foreclosure proceedings before the 120th day of
delinquency resulted in servicers doing so far less often in 2015 than in
2012.  CFPB also found this decrease was
not offset by an increase in foreclosure starts within the next several months.  This suggests that the Rule prevented rather
than delayed foreclosures.  Housing
counselors interviewed for the assessment said the foreclosure restrictions
were the most helpful to their clients of the Rule’s requirements.

Servicers in general said they had to make significant
changes to comply with these foreclosure restrictions and that they were among
the costlier provisions to implement. 
While agreeing in general with housing counselors, servicers also
suggested that the restrictions may have caused some borrowers to delay
initiating loss mitigation requests until they had fallen further into
delinquency.

Data indicates that a larger share of borrowers who completed
loss mitigation application in 2015 were able to avoid foreclosure than those
who completed applications in 2012. While loans had been delinquent longer post-Rule
before foreclosures were started, it suggests the foreclosure restrictions did
not increase the time it took servicers to complete the process.

The Rule’s force-placed insurance requirements include
a prohibition on charging the borrower until the servicer has provided disclosures
and met other requirements.  Servicers
said these requirements were generally consistent with the forced place
policies in place before the Rule, so the effects were small.  There was however a moderate decrease in the
number of force-placed policies, a trend consistent with the requirements but
one that could reflect other explanations such as changes in the insurance
market which made it easier or cheaper for borrowers to obtain their own
coverage.

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