For the average consumer, bundling purchases is a proven approach to improving value while reducing cost. Today, as the average residential mortgage servicer tries to meet the evolving regulatory requirements — and the reduction in default levels — servicers are faced with a situation of contracted revenues and increasing expenditure. In this environment where the servicer is faced with driving profitability, does bundling approach of technology and operations offer the servicer a better approach? Let’s take a look.
What Do Servicers Typically Buy?
According to the Mortgage Bankers Association’s 2013 Performance Report, while the average servicer earned about 28.1 basis points per loan in revenue, their direct expenses attributable to servicing totaled 12.5 basis points. The top three expenditure items included personnel costs, followed by subservicing, outsourcing and professional fees, and then technology-related expenses.
As the industry recognizes that improved technology is the long-term solution to operational issues, expenditure on technology is likely to increase. Given this, should the servicer who is in the market for new technology look to add more items to their shopping cart? Can they save by doing so?
What Do Servicers Typically Bundle?
Historically, some servicers have bundled corporate and escrow advance expenditures with technology including insurance products, valuation products, property preservation services, and others where the servicer was able to earn ancillary income. However, with regulatory scrutiny, most servicers have proactively moved away from this model.
Subservicing is the next most popular form of bundling. As smaller lenders try to benefit from the investment potential in servicing rights, subscale operations are not overly profitable, so subservicing (or in other words, bundling all servicing activities) is the preferred approach. But as a lender or servicer expands their portfolio and obtains scale — whether that is through in-house production or through acquisitions — subservicing appears to become more expensive. This is more apparent among the increasing number of small- and medium-sized servicers who have significantly expanded their portfolio and are now looking to bring their subserviced portfolio in house.
Does This Mean Bundling Does Not Work in Our Industry?
Bundling can definitely help our industry. The direct expenditure items that servicers incur are paid for from the servicer’s pocket, so they have to determine what to buy and who to buy it from. If there is an opportunity to benefit from bundling two purchases, then why not? That being said, only one question remains:
What Should Servicers Bundle?
Personnel and technology expenses are among the top expenditure items for servicers accounting for 8 basis pointsper loan. But can service providers step up to recognize this need and provide bundled solutions? We can safely say that, in theory, the concept of bundling can work well when the seller/provider possesses expertise in all of the bundled items, and the buyer spends their own money to acquire the bundled products and services. There are not too many solutions that offer this today. Whether technology and service providers can actually meet this need is a story that is yet to unfold. If servicers prioritize expenses from an income statement perspective, driving down cost via bundling can result in surprising lift in profitability.
Shashank CM is the servicing solutions leader for ISGN in Atlanta.
