In today’s complex regulatory environment, it can be challenging for servicers to provide quality service to consumers while also managing new process requirements from government-sponsored enterprises, Consumer Financial Protection Bureau regulations and state laws. As the industry moves beyond the recent mortgage crisis and into an unpredictable interest rate environment and new CFPB regulation, it is an interesting time for servicers.
This year, the market for mortgage servicing rights has heated up and the price for these rights has increased at least one full multiple while the number of active buyers appears to have quadrupled on advertised bids. As a result, the return on investment of the top line cash flow has been negatively impacted and sub-servicers may now have to lower their fees. Some industry participants appear to be splitting nickels on fees for assets worth hundreds of thousands of dollars. Why not spend an extra $1 per month, or $12 per year to pay a servicer the right amount to ensure everything is done correctly?
The argument against paying servicers additional funds relates to all that must to be done in posting the payment to the correct account, and taking advantage of the float, etc. That is not reflective of today’s environment. Yes, payments are posted, however, these payments need to be credited daily, done efficiently and with zero defects. Adjusting statements and ensuring the right party contact information is correct must be addressed; improving call center metrics is paramount.
Most investors today don’t believe there will be delinquencies. However, life events still happen—unfortunately unforeseen circumstances may cause an individual to default on his or her mortgage. The most effective way to help consumers through these events is to be pre-emptive, flexible and offer relevant solutions. Outside of the normal servicing activities, managing delinquency and offering loss mitigation options can be an expensive proposition for servicers. As the market changes and rates increase, everyone believes that servicing should be simple and low cost, but we are not there yet. The overall expenses related to maintaining compliance and implementing investor guidelines is significant.
How do we make sure servicers help consumers remain compliant and adhere to investor requirements all at a low cost? There are a few places to start:
- To guarantee a servicer can manage the right level of compliance, the fee should be reasonable; this may be an extra $1 per loan per month or some premium over the lowest servicing fee.
- Create new ways and better methods for servicer oversight. Transparency is key and all regulators appear to be saying the same thing. Know your vendors and ensure you have the right level of vendor management. Through technology and data integration, servicers should be able to deliver the appropriate oversight at a reasonable cost. Align incentives for managing delinquency and work outs.
- Accept delinquency and defaults while building a robust process to really understand the root cause. This helps to ensure a robust feedback loop into front end underwriting guidelines so as to close that loop and have better loan performance. Feedback needs to be immediate.
- Accelerate deploying innovative technology. Move beyond the legacy platforms and create new ways to manage loans and better serve consumers.
- Invest in new communication and coordination tools.
With a few simple steps, the servicing industry can be improved and an alignment between cost and value can be achieved. The momentum for realignment of servicer compensation seems to be dormant and there is a push to do more for less. As we move beyond the crisis, it appears that the focus is on CFPB compliance. I am hopeful that we can move towards innovation that delivers a better result at the right cost with the consumer always top of mind.