Housing values are off the bottom and possibly—but not likely—off to the races. Interest rates too, have begun what some might consider, a long and steady climb upwards. Most financial institutions might view these two facts alone as the primary reasons for beginning to accumulate servicing.
While today’s current economic conditions may appear to be ideal for an MSR purchase strategy, one must consider today’s competitive lending and servicing landscape as well.
Gone forever are the days of simply buying, boarding, collecting payments, charging fees and chasing delinquencies. Gone also is the view that a simple hedge against fluctuating interest rates and strict adherence to new CFPB standards are all the peripheral protection you need.
If there’s one thing the industry has learned over the past few years, it’s that the government will seek to provide whatever assistance is necessary to ensure the consumer has both the option to refinance (or modify) and the means for securing that financial relief. HAMP, HARP and HARP 2.0 were designed to keep borrowers in the black and lenders out of the red; and rest assured, HARP’s 3, 4, 5 and beyond will be structured to do the same.
To date, these government programs have succeeded somewhat in providing liquidity, opportunity, and incentives to both lenders and borrowers alike. However, as rates rise, and the pools of “low hanging fruit” continue to vanish from the refinancing universe, the industry will find itself face-to-face with the reality that simply advertising low rates, low fees, or another new government program will not be enough to drive the volume required to succeed.
As the industry adjusts (which it most certainly will) to another new mortgage paradigm that will ultimately solve for increased volume, and extremely borrower-centric collection, refinance and modification strategies, servicing portfolios will once again become the source for this new revenue stream. Meaning the MSR pools you buy will become the source for all.
The hedge against a dramatic pick-up in refinancing volume is an aggressive retention/recapture policy—or at least, that is what one would think. Today’s consumer, however, is smarter, quicker to a decision and a lot more open to creative marketing approaches than the servicing industry gives them credit for.
Here are a few facts:
Fact 1: Servicing premiums are as high as they’ve been in years; and if you think you’re buying cheap, think again.
Fact 2: The cost of servicing (and origination) will continue to rise in the future, and most of that increase will come from areas no one is paying much attention to today.
Fact 3: Vying for consumer loyalty will take on unprecedented technological advances in the years to come. Get on board with this, or move to the side.
These alone should be enough cause for concern over current MSR valuations.
The mortgage servicing industry is no more prepared for marketing to the needs of today’s borrower than they were in handling the fivefold increase in delinquency rates we saw a number of years ago.
That said, servicers and lenders both need to think outside of the box when looking to apply creative consumer marketing concepts and borrower behavior to the “old” mortgage banking models. “Statement Stuffing” is expensive and has a very low success rate. Email campaigns are also quite useless. Outgoing call campaigns are very expensive as well, and while pull through might be somewhat higher, the lack of channel control can make for a rather high cost of origination. Others are selecting direct marketing companies to design personalized birthday, holiday or anniversary mailers and emails. While these items tend to appeal to a financial institution’s marketing team, they are very limited in their success, given the costs, and far removed from appealing to the marketing-savvy mortgage consumer.
Then there’s the loss mitigation/prevention aspect. Historically, the most successful servicing strategies include the timely and effective use of incentives, consumer marketing, and relationship banking. Establishing an early relationship with your consumer is the very best hedge against future losses, and the perfect tool to cross-sell product, retain borrowers and promote a healthy referral business. Finally, the methodologies for delivery of these messages should be cost effective, time sensitive, product appropriate and simple.
The key to a successful MSR acquisition strategy starts and ends with the relationship you establish with your consumer at the outset. If it’s poorly designed, or off target; you’re ultimately ignored. If it’s too pushy, you’re shut down for good. The borrower connection should be educational in nature, focused on that which is relevant and timely, and delivered in a way that would appeal to the consumer’s propensity to help you manage risk. In other words: create an alignment of interest and not simply a friend.
Frank Pallotta is managing partner of Loan Value Group.