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A national set of mortgage servicing standards?

By: 17 July 2011 One Comment

Anyone who has been following the mortgage industry knows by now that the federal government is taking a hard look at loan servicing standards.

Why? We saw a good number of people lose their homes and lenders lose money as mortgage failed, in part due to relaxed lending standards and even lower standards by Fannie Mae and Freddie Mac. Indeed, the two government sponsored enterprises that control over half of the nation’s loans that are bundled and sold as mortgage backed securities relaxed their standards, too. Throw in reduced documentation requirements and the result was a lot of foreclosures and people calling for reforms.

The federal government has listened to those demands and talk has circulated around the nation’s capitol about the need for a set of national mortgage servicing standards in hopes of protecting both consumers and lenders. The notion, of course, is that reduced risk to lenders means fewer defaults and that’s good for both the lenders who lose money when a mortgage fails and good for people who lose their homes when they can’t meet their loan obligations.

A lot of the regulations have to do with the secondary mortgage market. Anyone who has taken out a mortgage at a bank and winds up sending their monthly payments to another institution knows a bit about the secondary mortgage market. Simply put, mortgage packaged as securities and sold in the secondary mortgage market results in credit that allows additional people to take out loans and purchase houses. The payments are collected by servicers who, generally, aren’t affiliated with the lenders who approved the mortgages.

The question, of course, is what should a set of national lending standards be? The national Mortgage Bankers Association gave its input on its issue on July 7 when the group’s President and Chief Executive Officer David H. Stevens testified before the House Committee on Financial Services.

Stevens said his trade group believes a consistent set of standards for servicers and consumers will benefit both groups. He set out a group of principles that the Association believes should be embraced by those coming up with new national standards:

? National servicing standards must be truly “national” in scope rather than another layer on top of existing federal and state laws and regulations. That step, Stevens said, reduces expenses to the lenders who must interpret varying rules and regulations and consumers who are already intimated by the complexity of standards and requirements.

? The process through which those standards are developed should be transparent and include input from mortgage servicers and investors. Stevens pointed out that lenders must implement those standards and private investors – who are needed to back the nation’s mortgage credit industry – have a lot at stake when it comes to new or additional mortgage requirements.

? The process through which new standards are developed must recognize exiting requirements. Stevens said lenders are already subject to a number of laws and regulations set up to curb problems in the industry. Those existing rules, he said, should be acknowledged.

? Rules should allow flexibility to deal with market changes. Stevens advocates the establishment of end results that need to be met, thus leaving lenders to figure out how to meet those objectives.

So, there are but a few principles that Stevens set forth. In the months to come, we ought to know how many have been implemented.

Home Sweet Home is written by Ethan C. Nobles and is sent weekly to publications throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email =

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