New Lease on Life for Lenders

"No one wants origination capacity right now," says Matt Howlett, an analyst at Fox-Pitt Kelton. "What they do want is to buy some of the distressed loans in the market. There is a lot of potential upside in terms of the returns ... but in order to be able to realize those terms you need to control the servicing."

But targeting the servicing businesses is also like building the foundation of a house. The seemingly mundane tasks of bill collecting and loan monitoring are the steady cash flow engine of the mortgage business, and they take a more active role in creating profits during housing downturns. The more people struggle with their mortgages and interest rate resets, the less likely the borrower is to make prepayments. This means any loan is likely to stay alive longer, and lenders thus collect more servicing fees from it.

Congress has recently pressured mortgage servicers to provide more borrowers with loan modifications or other recuperative steps to avoid foreclosure, which is costly to both the borrower and the lender.

"In this environment where mortgage banks might not be making money on the origination side, servicing acts as an offset," says Howlett. "Clearly if you're not originating loans that would mean that a lot of borrowers aren't refinancing [or prepaying] and that just means that servicing fees just get bigger and the servicing asset becomes more valuable."