Servicing Business Becoming Unprofitable

Costs associated servicing a performing mortgage are projected to increase between 25 percent and 50 percent compared to pre-crisis levels.

On non-performing loans, the costs are likely to more than double.

That assessment came Thursday from Fitch Ratings.

“Fitch Ratings says housing recovery in the U.S. has been unhurried, and banks have been forced to shoulder higher foreclosure expenses,” the New York-based firm said in a statement. “Fitch feels increased foreclosure costs combined with additional credit, compliance, regulatory and other real-estate-owned expenses are beginning to have a profound effect on the mortgage banking industry.”

And the Consumer Financial Protection Bureau is only expected to make the situation worse.

The ratings agency said things are getting so bad that some mortgage lenders are finding that it is becoming too uneconomical to remain in the business of making residential loans.

In the past, fees from performing mortgages were enough to cross-subsidize the cost of servicing defaulting loans. Supporting this analysis are Bank of America Corp. and JPMorgan Chase & Co., which have each recently handed off defaulted and nonperforming loans to smaller special servicers.

“We believe the spike in cost will place additional emphasis on economies of scale and are likely to drive consolidation in the industry,” the report said.

Another factor that is likely to drive firms out of the business is servicing-released premiums, which have seen a “meaningful decline,” according to Fitch. The trend has forced firms that had been selling servicing to find alternative buyers or just retain the servicing on higher quality loans they originate.