Before the Dodd Frank Act went into effect in 2010, the residential mortgage market was in an entirely different state — particularly in regards to servicing. Several large servicers dominated the market, but ultimately shed most of their servicing assets, creating a substantially large segment of midsize servicers.
Historically, these midsize bank and nonbank servicers have focused on increasing originations rather than building their servicing operations. The largest barrier to sustaining a viable servicing operation was the high cost per loan due to a lack of economy of scale, so these institutions opted for a subserviced portfolio. Subservicing was an attractive alternative because it offered midsized servicers reduced capital outlay, sophisticated technology, expert resources, efficient processes and strong compliance standards.
The consolidation among larger servicers and the refinance boom have enabled midsized servicers to create a more sustainable servicing operation than in the past. Since these servicers now own a sizable portion of servicing rights, they are beginning to consider whether they should move their servicing operations in-house.
As previously mentioned, there were several benefits that originally drove these players toward subservicing. State and federal regulators recently revealed that some of these subservicers' practices may not be as strong as the industry once thought. Subservicers typically offer only one, generic technology platform, and more often than not, this platform is outdated. Relying on outdated technology to service loans not only increases risks in regards to compliance, but it can also have a negative impact on a servicer's customer service efforts.
While subservicing now exposes servicers to the potential risk of poor servicing practices and low customer service standards, shifting servicing in-house may not make sense for everyone. Balancing operational costs and control will be a challenge, so servicers must carefully assess the viability of their operational model.
First, a servicer should evaluate its technological capabilities. Many servicers rely on multiple platforms that function in silos, but this is actually dysfunctional — a servicer's technology platforms must have the ability to interact and share data between each other. Additionally, smart systems that are workflow-enabled and offer robust reporting and oversight are key, such as a system that offers an alternative Business Process as a Service model (defined as services on a cloud platform).
The next step is for servicers to ensure they have created an experienced team of professionals that are well versed in how loans should be serviced. Servicers should also provide their staff with periodic training, both regulatory and operational, to keep personnel abreast of the latest regulatory requirements. Servicers may also want to consider outsourcing non-critical tasks if they are lacking resources in a certain skill set.
Lastly, servicers must ensure the viability of their servicing operation. A strong quality control program, vendor oversight and a robust reporting infrastructure are necessary to maintain a healthy servicing operation, and most importantly, provide excellent customer service.
In an era where the role of midsize servicers is becoming increasingly important, the traditional servicing model must be re-evaluated. As midsize services evaluate their processes and prepare to develop their own servicing operation, they must break the mold and explore alternative servicing models that incorporate operational control, scalability and access to seamlessly interacting technology within a smarter, unified platform. Given the dynamic market conditions, many of the midsize players may find themselves being mega-servicers in a matter of time. Planning today will prevent many of the issues going forward.
Shashank CM is servicing solutions leader at ISGN.