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Servicing: a real cliff-hanger.

SERVICING A Real Cliff-Hanger

Just when you think you've got a real grasp on what it takes to make decent returns on a servicing operation, somebody does something that makes the ground fall out from under you. Perhaps the rock climber on our cover this month overstates the risks currently facing servicers trying to straddle the thin line between the red ink and the black. But increasingly, I suspect, servicers feel like they're being caught between a rock and a hard place.

Washington is the source of much of this anxiety. The FDIC's proposed regulation that puts a 25 percent limitation on the amount of purchased servicing that can count toward core capital is already creating a chill in the marketplace. Regulated institutions who buy servicing feel the proposed rule has once again shifted the playing field in a way that puts them at a marked disadvantage. Even the Resolution Trust Corporation is balking at the proposal because it makes it harder to find buyers for the RTC's growing inventory of servicing. The RTC's inventory is having its own impact on the servicing market--the overhang of government-held servicing is depressing prices.

Housing legislation moving through the U.S. House of Representatives is carrying provisions that affect mortgage servicers. The House version of major housing legislation contains provisions authored by Rep. John J. LaFalce (D-NY) that would create new money penalties that servicers could be hit with if a court finds they have shown a "pattern or practice of noncompliance" with the servicing transfer rules outlined in the bill. At the time this was written, those provisions also created the opportunity for aggrieved borrowers to press class action suits against servicers. The bill lays out rules for upfront disclosure to borrowers about the likelihood that the servicing will be sold. It also requires originators to detail for the borrower what past practice has been and whether there is present intent on the lender's part to sell that person's servicing. Then on top of that, the bill details what will be required as far as notice to consumers when an actual servicing transfer takes place.

The Internal Revenue Service is yet another Washington-based institution that has taken a new interest in the servicing business. A case in Michigan involving an IRS agent has raised some eyebrows. Reportedly, the lone agent, acting on his own, launched the theory that originated servicing should be taxed from the moment it is put on the servicer's books. A copycat case has reportedly sprung up in Texas, so the IRS is yet another federal entity that servicers should keep an eye on.
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Title Annotation:mortgage loan servicing
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Article Type:editorial
Date:Jun 1, 1990
Previous Article:Economic trends.
Next Article:Boardroom view.

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