Flexibility Is Cornerstone of Alliance's Subservicing Strategy
Alliance Mortgage Co. executive vice president of loan administration, Mike Koster, describes his company's current strategy in subservicing as focused on providing flexible solutions for its key clients "through service level commitments, special default control strategies or accommodating a more complex product menu."
Alliance does not "view subservicing as a commodity," Mr. Koster explains. The full-service mortgage company originates loans in 42 states, servicing over $26 billion in first mortgage loans throughout the country. It's portfolio has grown significantly during the last couple of years despite competition.
"Our current challenges relate to the higher cost structure associated with a heavier prepayment environment," noted Mr. Koster.
As with any owner of MSRs, the executive keeps "a very close watch" on the industry, specifically on "market vs. economic values of MSRs and the risk of misjudging prepayment characteristics of a particular product."
"The past year or so we have leveled out, with a good balance between additions and prepayments," said Mr. Koster.
"High prepayment volumes increase the operational responsibilities (call volume and lien release, most notably), while decreasing the denominator in your unit cost calculation," explained the executive referring to today's challenges in subservicing. "The MBA reported a $6 increase in average unit cost to service in the industry, and I would be surprised if that number doesn't go up again in 2002."
The average "shelf life" of Alliance packaged loans varies by loan type.
"We have certain products running off in the 10% range, with others prepaying at many multiples of that," noted Mr. Koster. "In a subservicing relationship, you may misjudge your cost structure related to a portfolio with higher prepayments than you anticipated, but that is likely to be little more than an inconvenience."
That same error can be "much more costly" in an MSR valuation, explained the executive as "operating cost is the major factor in pricing subservicing correctly, not runoff," whereas the opposite is true when purchasing the related serving rights.
As to products, Alliance operates using "a fairly" broad menu of service options for its clients and business partners, flexible enough to offer solutions customized to fit specific needs.
"We're wide open," says Mr. Koster. "Alliance has a diverse servicing portfolio of its own, including 800 investors, 400 ARM varieties and the extremes from a credit quality standpoint including high-credit quality jumbos to repackaged GNMA pool buyouts."
Although not a subprime servicer per se, Alliance acquires and services subprime loans including a number of low- to moderate- income programs that may feature above average delinquency rates.
Over the past two years, diversified service combined with automated underwriting and a favorable market, among other reasons, helped grow Alliance's loan portfolio to over $26 billion in servicing. Since the application of the VirPackPrep software in 2001, loan-processing costs dropped significantly while speeding up data delivery and storage.
When it comes to their company's competitive edge, Alliance executives are most proud of its evolution to a diverse, full-service financial service provider taking "a flexible and opportunistic" approach to growing its business.
Alliance has entered into strategic relationships "with key clients" in the servicing market. One such agreement was its contract with the Charlotte, N.C.-based First Union Mortgage Corp., which at the end of 2000 agreed to subservice approximately $9 billion, or 70,000 mortgage loans. As part of its subservicing function, First Union assumed responsibility for payment processing, escrow disbursements, customer service and default management.
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