The U.S. Mortgage Market Needs Better Plumbing

Spare a thought for the mortgage servicer. As unsung professions go, perhaps none plays a more crucial role in the functioning of the U.S. economy. Month after month, servicers collect interest and principal payments from millions of American homeowners and pass them on to lenders and investors. They produce account statements, negotiate with borrowers who don’t pay and — if things go badly — handle foreclosures. Done well, the job facilitates lending and makes the whole housing market more resilient.

Unfortunately, it’s not being done well, for reasons partially out of servicers’ control. As a result, creditworthy borrowers, especially among low-income and minority groups, are finding it harder to get loans. And traditional banks are yielding more of the business to financial firms less bound by rules on safety and soundness. This needs to change.

For most of its existence, servicing was an obscure but lucrative business. Servicers’ fees (typically an annualized 0.25 to 0.50% of a loan’s balance) amply covered their costs, because they rarely encountered delinquent loans — the most labor-intensive part of the job, requiring a lot of personal contact with individual borrowers. The rights to service mortgages were a sought-after asset, completely separate from the actual loans. Large banks such as JPMorgan Chase and specialized servicers such as Ocwen Financial all got into the business.