While evolving market conditions have made retaining servicing rights more attractive to independent mortgage bankers, making the right choice between an in-house operation or engaging with a subservicer is critical to the new business line's success.
Large bank servicers are shedding MSRs and limiting new acquisitions ahead of pending Basel III capital requirements. Meanwhile, the mortgage industry's per-loan direct cost to service a mortgage averaged $55 per year in 2006, a figure that increased 275% to $206 per year in 2013, according to the Mortgage Bankers Association.
But smaller companies have higher per-loan servicing costs because they don't have the scale their larger peers use to drive down costs — making thorough financial analysis of both loan production and servicing portfolio all the more critical.
"You can't afford to have a lack of granularity on your margins," Mike Duncan, senior hedge manager at San Francisco-based Compass Analytics, said during a Dec. 4 panel at an industry conference.
In its early years as a small servicer, Guild Mortgage had a per-loan servicing cost of $200. As it's grown and developed its own servicing platform and proprietary systems, that cost has been reduced to approximately $100 per loan, said Terry Schmidt, chief financial officer of the San Diego-based lender and servicer.
"We have our own system and we're getting the benefit of that scale," she said during the panel, adding that given the complexity and high cost of establishing a platform, midsize lenders looking to retain MSRs for the first time may find it easier to use a subservicer.
Increased compliance demands placed on the mortgage servicing sector have focused on the ease with which MSR transfers are handled and mortgage firms' oversight of vendors, including subservicers. Firms like Dovenmuehle Mortgage have responded by assignment dedicated staff to handle client inquiries, as well as "significantly greater investment in the transparent technology to allow for more streamlined access to data, more drill-down, more dashboards," said David Allison, a senior vice president at the suburban Chicago-based subservicer.
"There's much more interaction between the servicer and the subservicer" to meet vendor oversight regulations, Allison said. When evaluating subservicers, he advised lenders to "underwrite the relationship the same way you would if you were making a term loan to that company."
Regardless of whether a lender servicer manages its own portfolio or uses a subservicer, the decision to retain and hold MSR assets has to be a long-term strategy.
"Whatever decision you make on servicing, you have to be incredibly sure this isn't a decision you're going to make just for 2015...It's not a one- or two-year decision," said Al Blank, president of Strongsville, Ohio-based Union Home Mortgage. "It takes a lot of infrastructure, a lot of planning and there are a lot of things you have to be prepared for."
A lender's management and ownership must both understand that servicing portfolio values can fluctuate, particularly when MSR pricing makes it more economical to sell new loans servicing-released at the expense of new loan production volume not keeping pace with servicing prepayment runoff.
"I've been scarred and I've had parties over servicing," Blank said. "How much of your owners' capital are you prepared to put into servicing?"
