Blame It On The Servicers

In a blog appearing in the Wall Street Journal for December 19, 2014, the author is blaming loan servicers for the tight credit market despite the relaxation of the QM rule and the requirement that lenders retain a 5% stake in mortgages they sell that have LTVs of greater than 80%.  The blogger cites a research paper released by the Urban Institute that indicates that the high cost of servicing delinquent loans is keeping lenders from loosening their credit standards to accept less than prime borrowers.

The blog indicates that last year the cost of servicing a delinquent loan was $2300 per year compared $156 annually to service a performing loan.  The cost of servicing a delinquent loan rose by 5 times the amount that was spent to service a delinquent loan in 2008.

The blogger indicates that there are three factors that influence the cost of servicing a delinquent loan.  The first factor is that lenders cannot forecast the cost of servicing delinquent loans because the cost is rising at an uncertain pace.  Secondly, the blogger indicates that the federal government has an internal conflict of interest between Fannie, Freddie, FHA and CFPB.  The GSEs and FHA want to minimize the process of dealing with delinquent loans and CFPB is putting in place various programs that prolong the delinquency by providing for modifications which only serve to postpone the inevitable foreclosure.  Thirdly, companies that specialize in servicing loans and delinquent loans in particular are coming under fire by regulators and new regulations and hurdles.

It seems a bit of a stretch for someone to blame tight credit standards on loan servicers in 2014.  Tight credit has been with us and lenders are more conservative than ever with the plethora of new regulations that have been enacted.  The one thing I might agree to with to a lesser extent is the internal conflict in the federal government, but I am not certain that the conflict is solely between CFPB and the GSEs and FHA.  Congress may have had a hand in all of this with the Dodd-Frank Wall Street Reform Act.

Republicans are vowing, with their new found control of Congress that they are going to strip down the Dodd-Frank Act.  Will that help loosen credit standards or are we stuck with tighter credit standards because of the high cost of servicing delinquent loans?  What do you think?