As much as it is a challenge, subservicing is an opportunity many small-size servicers are rushing to embrace in a marketplace where the role of specialty servicer is being redefined.
“There’s certainly a shift in the subservicing market,” senior product manager at Fiserv Lending Solutions, Monica Orluk told this publication, driven to a large extent by the fact that “mega-servicers are still struggling with where they have landed after the financial crisis as they realize they cannot be all things to all people.”
It means loan holders are moving loans out from the mega-servicers and into smaller-size, specialized servicers with certain types of portfolios. It is more convenient and effective because many of these competing entities already have the technology, resource infrastructure and operational processes in place, and “are ready to service a special portfolio of loans, be it agency loans or private investment, in a very cost-effective manner loans.”
Kenneth Richey, managing partner of Richey May, a CPA and advisory service specializing in the mortgage industry, agrees that many new entities are getting into the subservicing space, “including privately held mortgage banking companies with legacy servicing portfolios,” just starting to offer third-party servicing for other independent lenders.
Changes are multidimensional due to a shift in strategy within the subservicing space, he said. For example, specialty servicers of subprime and delinquent portfolios are now “expanding into servicing more traditional portfolios and applying their high-touch servicing models to conventional servicing.”
Ongoing servicing market shifts that have resulted in large sales of mortgage servicing rights are simultaneously heating up demand for subservicing and competition among qualified entities looking for new business opportunities.
One good thing for servicers in expansion mode is that due to these shifts “there will be more talent available to hire,” says Dave Vida, president, correspondent lending and servicing, LenderLive Network. Likewise, processes and technology are readily available. The biggest challenge for small- to medium-size firms entering the specialty servicing market is “getting more loans to service.”
Demand for specialty servicers who have the experience and tools necessary has soared considerably, he said, probably by 40%, if one were to make a rough calculation. Vida warns, however, that run-offs can be a problem if the revenue is UPB based. “It’s a tough business.”
As these shifts occur, agrees Orluk, “a lot is happening” from the operational, process and technology perspective.
The No. 1 issue with this major movement of services from mega-servicers to smaller, specialty servicers “is regulatory compliance requirements that make servicing of smaller portfolios more difficult.” Between complying with the CFPB requirements and the national servicing standards, smaller servicers and subservicers have to make new investments in technology and personnel, which in turn spike up the per-loan cost of servicing. Hence, they must assess whether the servicing costs exceed the potential return.
But despite cost challenges many servicers see subservicing as an opportunity and already have made the changes needed to comply with the regulatory requirements and are well positioned to service loans for others, she said. Third-party servicing ultimately leads to investing in higher-cost efficiencies that benefit everyone.
Newcomers may not be new to mortgage servicing but they are new to subservicing, she said. “They see subservicing as a wonderful way to recoup some of the costs they had to put out over the past few years,” when operating on crisis mode and implementing strategic business changes.
Both start-up entities and existing servicers are expanding further into the subservicing market. Most are constantly restructuring business operations in an effort to align operations in a manner that makes it efficient to obtain a new client, quickly board loans into their operation and deliver the servicing quality clients expect at the lowest cost, Orluk said.
“That’s really where I think the restructuring focus has shifted. Prior to the crisis the key focus always was on the investor. Now, the foreclosure crisis, the CFPB and the economic state of the country itself has forced the market to focus more on the end borrower.”