Banks Abandoning Mortgage-Servicing Business

Bankers still like to loan mortgage money but some have concluded that collecting the payments is too much trouble.

Many are selling their mortgage-servicing businesses, which handle payments and keep track of what’s owed.

In the last two weeks, several banks around the country have said they will bail out of mortgage-servicing. Others already have quit the business.

The banks say they aren’t abandoning the home loan business. They’ve just decided that profits from servicing mortgages don’t justify the expense of maintaining customer service lines and paying for computerized accounting.

“We don’t want to make the necessary investments to stay in the business,” said Robert S. McCoy, chief financial officer at Wachovia Corp., a banking company in Winston-Salem, N.C., that put $9 billion worth of servicing rights on the auction block last week.

Bankers say the changes will have little everyday impact - borrowers will just send their monthly payments to a different address.

But others aren’t so sure. Credit counselors, who advise people troubled by debt, say mishaps can occur when servicing changes hands. They advise borrowers to keep canceled checks and other documentation.

“Screw-ups do happen,” said Cora Fulmore, director of housing at the National Foundation for Consumer Credit, based in Silver Springs, Md.

“I’ve seen situations where payments have not been applied, payments have been lost or the customer didn’t read the notice about the switch and sent their payment to the wrong company,” said Fulmore.

Servicers are required to advise customers in writing at least 15 days before their account is transferred under a law that took effect last month.

Customers will get new payment-coupon books, or will be sent a monthly statement and bill.

Fulmore said she believes 15 days notification is inadequate, but says most lenders alert customers 60 to 90 days before the switch.

Not all banks are exiting the business. The biggest home lenders in the country - such as Norwest Corp., which services $70 billion worth of mortgages - are gobbling up servicing units, adding to their already huge operations.

They can afford to. Because they process thousands of loans, their cost of doing business is lower than smaller lenders.

Regional banks say their costs are too high. Amsouth Bancorp., based in Birmingham, Ala., said last week that its servicing business - the bank handles $10 billion in servicing - is not big enough to keep.

Meanwhile, Bank of New York Co. Inc. has been seeking to sell its California-based mortgage business for months, and may liquidate the unit if it can’t find a buyer, the bank said last week.

Banks have been buying and selling mortgage servicing rights for years. After banks make a home loan, they usually sell the mortgage itself, which is bought, repackaged into debt securities and sold to investors. The banks then sell the rights to service the mortgage, usually to another bank.

But more banks are getting out of the servicing business now. There are several reasons. Most mortgage companies have seen their home lending business plummet because higher interest rates have depressed demand. The high cost of servicing is a drag on a business where margins already are razor thin because of competition.

The average cost of servicing a single loan was $111 a year in 1993, compared to $89 a year in 1990, says the Mortgage Bankers Association, a trade group.

When the check comes in, the servicer is responsible for separating interest from principal, and divvying up the money to pay property taxes, property insurance, escrow and investor groups if the mortgage has been securitized.

If a loan becomes delinquent, the service must go after the customer and, if the customer can’t pay, assume the legal costs of foreclosure.

The process gets even more complicated if customers reside in different states. Only the largest services can afford regional offices, such as Norwest.

“Once you get to a certain size, you’re incremental costs can be driven down,” said Mark Oman, president of Norwest.