There is a movement toward retaining servicing rights benefits. It involves originators and the wider mortgage industry.
As the mortgage industry continues to rebuild, there is now a growing movement encouraging more originators—regardless of their size—to service the loans they originate. Traditionally, large lenders have been able to garner huge portfolios, and great profits, solely through originations.
However, government entities like the Consumer Financial Protection Bureau are urging originators to retain their mortgage servicing rights and service loans throughout their entire lifecycle, anticipating that this trend will prevent several of the industry’s previous challenges from recurring.
An industry's transformation
Over time, the idea of originators servicing their own loans has been lost and the benefits forgotten. Instead, the country’s largest lenders have dominated the servicing industry. According to market data, in June 2012, Wells Fargo, Bank of America and JPMorgan Chase alone serviced 46% of the country’s mortgage debt. Now, controversy and flawed foreclosure practices have led to additional compliance requirements, and costs, for large banks. Several, including Wells Fargo, have exited the wholesale space, leaving fewer organizations to purchase loans and making it an opportune time for smaller and mid-sized lenders to either begin, or reestablish servicing operations. Additionally, low market prices mean quick returns for originators keeping these assets.
For example, an originator that sells the MSR of a $200,000 loan at 75 basis points receives $1,500 income upfront, recorded immediately at 100%. Instead, by retaining the MSR at a service rate of 25 basis points, an originator receives $500 annually and spends approximately $100 annually to service that loan, leaving a net gross servicing income of $400 a year. By servicing the loan, the originator recovers the $1,500 MSR income forfeited in 3.75 years. With a higher servicing rate, this income will be returned even faster.
Hurdles, not roadblocks
Many mortgage companies are hesitant to take on servicing for several reasons. Servicing requires expertise that many originators simply don’t have. In addition to the knowledge needed, many also don’t have servicing technology and are not willing to make a large capital investment either in new systems or servicing personnel.
Also, many originators fear they will not be able to keep up with rapidly evolving government regulations. Servicing regulations, especially those over default servicing, are becoming more and more complicated. What originators must realize is that making an investment in a technology platform does not have to break the bank. It can prove extremely cost effective while providing the automation banks need to uphold the ever-changing compliance obligations.
Outsource technology, not servicing
In addition to reaping the financial profits, by retaining at least some MSRs, originators can solve for what is arguably the biggest problem associated with outsourcing and even subservicing: customer service.
A home is the largest investment most people will ever make; however, today they have no control over their servicer. Servicers have also gained a poor reputation for inattentiveness, slow processes and unresolved mistakes. Instead, consistent loan management by the originating organization could even reduce delinquency volume—servicers with consistent ties to borrowers can proactively reach out after a few missed payments and provide assistance earlier in the process.
Additionally, government agencies are much more apt to work toward a foreclosure alternative with an originator that has retained the MSRs, which can save a loan in default and help originators avoid a buy-back.
Servicing allows lenders to build strong relationships with borrowers. While each asset has a value, it’s impossible to put a numeric value on strong referrals and the countless cross selling opportunities an institution has by remaining a borrower’s servicer throughout the life of the loan.
While originators are focused on instituting lending practices that follow new regulations, loan servicing is another key to strengthening their businesses and the industry.
They must remember, it does not have to be all or nothing—keeping just a portion of servicing rights, especially at the onset, provides time to gain experience in the servicing arena. Expanding and improving business certainly takes careful consideration and planning, but the investment comes with great rewards for originators and borrowers alike.
Jim McDonald is the founder and president of the McDonald Computer Corporation.