A Primer on Subservicing Relationships
July 19, 2017
Since the financial crisis of 2008, the mortgage servicing industry has gotten significantly more complicated, competitive and costly. According to the Urban Institute, the cost to service a performing loan has effectively tripled, from $59 per loan in 2008 to $181 in 2015. Servicing a nonperforming loan is five times as expensive, rising from $482 per loan to $2,386 per loan.
Post Dodd-Frank, mortgage loan servicers, holding over $10 trillion in contracts, now face heightened attention from state and federal regulators, and compliance is top of mind for every executive.
As lenders and banks continue to look for ways to reduce their leverage and risk by selling mortgage servicing rights, subservicers will play a larger role in the overall mortgage market. But what should mortgage executives look for in a subservicing partner? A forward-thinking attitude regarding new technologies? Innovative team? A focus on developing quality, long-lasting customer relationships? Air-tight quality control and compliance, along with a sterling reputation with agency partners and regulators?
In a word, yes.
While their role in the mortgage industry is often overlooked and doesn’t always grab headlines, quality subservicers help keep delinquency rates low and ensure lenders have a secure and stable source of capital for new loans. Bad loan performance threatens liquidity more than almost any other market factor. Subservicers are also crucial players for consumers, considering they manage what is likely their largest asset, and a key cog in the overall health of the neighborhood and surrounding community.
A Primer on Subservicing RelationshipsWith that in mind, when contracts near expiration and lenders begin to look for a subservicing partner, it is important to remember that a good subservicer does more than just reduce delinquencies. Great service helps create customers for life – those who will return for a refinance or their next purchase loan. Additionally, better loan performance enhances the value of the loan on the secondary market, improving the value of the lender’s assets.
What are the most important qualities to look for in choosing a subservicing partner? While not exhaustive, here are a few items for your checklist:
Performance and culture
This much is obvious – the company must be able to successfully take care of your customers and your assets. There are a variety of specific metrics you can take advantage of to get a clear picture, including loan performance (delinquency and cure rates), third-party performance scorecards, accounting reviews, and customer service reviews.
Specifically, make sure you examine a subservicer’s record on key customer-centric data points, such as the average speed to answer an inbound call (60 seconds or less) and call abandonment rate (5% or less).
Additionally, Fannie Mae requires its servicing partners to adhere to established foreclosure time frames. The variety of foreclosure-related legal structures in each state means subservicers must be cognizant of both judicial and non-judicial requirements and maintain acceptable timelines. For instance, Fannie allows up to 300 days in Tennessee, while the judicial foreclosure process in Washington, D.C., may take up to 1,230 days to complete.
Perhaps just as critical as the bottom-line performance stats is the company’s culture, which should align with your company’s culture and vision. First and foremost, make sure the subservicer has a customer-centric model and culture that is more than just a catchy slogan or a “motivational” poster in the CEO’s office. From top to bottom, employees must be driven to help borrowers. Are they proactive or reactive to customer concerns? Note how long it takes the team to respond to an email from a borrower. Find out if they anticipate problems and delinquencies or if they find themselves scrambling to react.
Review the subservicer’s current portfolio and performance to determine if there is appropriate capacity for growth and scalability. In addition, you should plan to conduct a thorough on-site due diligence meeting. Inquire with the management team to understand what their typical client is like and what has been onboarded in the past year. Also ask how many clients have transferred out and why. Determine if they have any client concentration and, if so, what steps the subservicer is taking to mitigate that risk.
Also, ensure the subservicer can handle additional business while maintaining quality service. A good rule of thumb here is don’t try and add more than 15% to 20% to a subservicer’s portfolio at a time, and closely monitor performance.
Remember that we live in the highly regulated, increasingly complex era of Dodd-Frank/Consumer Financial Protection Bureau (CFPB), not to mention a host of strict state-based servicing rules. In many ways, servicers are the ambassadors for the industry, and if your potential subservicing partner isn’t equipped to operate in that environment, your reputation and business could be at risk. Make sure you know exactly what its policies and procedures are for handling a delinquent loan.
A Primer on Subservicing RelationshipsReview the management team to ensure that there is requisite depth and breadth of experience, with assets similar to yours. Also investigate employee tenure and experience. Focus on issues such as turnover – a key measurement. Determine if the company offers its employees any educational reimbursements or other benefits that are important to retain staff. Ask how extensively the staff is trained, particularly with maintaining compliance with CFPB rules and guidelines. Subservicing executives who have spent time “in the trenches” in loan servicing and have more than a superficial knowledge of the day-to-day effort that goes into providing top-notch customer service are critical to success as the portfolio expands.
In addition to doing your own research on-site to evaluate a subservicer, you need to make sure you obtain a second opinion. Start by finding out how the ratings agencies score the company. Check servicer ratings from trusted servicing agencies.
What’s the organization’s reputation? Ask around within the industry and find out if, for instance, the compliance team is well-regarded or if colleagues and regulators consider it to be a company that cuts corners.
What’s the company’s industry experience? Solid subservicers don’t spring up overnight; it takes time to acquire the talent and experience to navigate customer and compliance challenges. Further, you need to know if a potential partner has caught unwanted attention from a regulator. While not necessarily a deal-breaker, it’s something to make sure you know about in advance.
Technology is rapidly changing the mortgage landscape, and your subservicing partner must be ready to do more than just cope with disruptive change; it must be prepared to embrace change and use new technology options to improve customer experience and streamline internal processes.
Borrowers using mobile banking apps expect the servicer to provide innovative tools for them to more easily pay their mortgages. At a minimum, a subservicer must have a robust and user-friendly website to ensure a positive borrower experience. Making technology adoption a part of the company’s culture will also demonstrate the desire to maximize efficiencies in the right way without sacrificing quality service. Invest in people and customer experience, not in parts of the business that don’t directly impact borrowers.
Finally, be well-acquainted with the company’s financial positioning. Find out if your subservicer is an affiliated company, and if so, determine what the parent company is. If you see stress with any related companies, be warned that if that cascades down to the subservicer, there’s a good chance the quality of customer service will be negatively impacted.
All of this will take time, so be patient and thorough. A subservicing relationship is critical to any lender or investor business model. The assessment of a new partnership must be comprehensive and go beyond a Google search and a call or two. The right subservicing partner will expand and extend lending opportunities for the next generation of borrowers.
Allen Price is senior vice president of business development at RoundPoint Mortgage Servicing Corp. He can be reached at firstname.lastname@example.org.