Proposed AG settlement may price out smaller mortgage servicers

The 27-page proposed settlement between state attorneys general and mortgage servicers leaked last week will, in its current form, negatively impact servicers and investors, one credit rating agency said Monday.


The draft settlement, also known as "the term paper," will hike up the operational cost of servicing, extend foreclosure timelines and decrease competition in the marketplace, according to Moody's Investors Service (MCO: 31.94 -1.30%).

"Implementation of the proposed terms will be painful and costly for servicers," Moody's analyst report in the Weekly Credit Outlook. "Our initial opinion is servicers and investors will be taking it on the chin."

There are approximately 16 points mortgage servicers must follow with regard to foreclosure affidavits. Robo-signed documents need to be reviewed, with proof required that proper processes were taken. There are a further 12 points for requiring the accuracy and verification of the borrower's account information.

All of these provisions would be at the expense of the servicer.

There are also additional reporting requirements to agencies and third-party audit programs, as well as updates to controls and audit protocols "all of which will be labor intensive for servicers and require additional resources," Moody's said.

Whereas large banks can absorb the extra costs updates and changes will require, small banks and lenders "may be priced out." Currently, the servicing industry is highly concentrated with the top four firms accounting for 58% of market share.

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