In today’s servicing market, there seem to be a lot of concerns that non-bank servicers are not as highly funded as bank servicers, take greater risks than banks and approach asset management differently.
Mortgages are arguably the most complex of all consumer banking products. They are more complicated than checking accounts, savings accounts, credit cards, auto loans, and student loans.
Once you start layering all of the regulation and oversight, servicing home loans becomes an even more complex process. It is impossible for someone to work in the mortgage industry for a short time and understand all of the complexities. Some people who have worked in the industry for decades may still not understand how to best manage servicing at the loan and portfolio levels.
Having had the pleasure of working for both bank-owned mortgage servicers and non-bank mortgage servicers during my almost three-decade career, I have come to realize the many differences between bank and non-bank servicers are positives.
Banks and non-banks approach servicing from two different viewpoints. While their views might be divergent, both industry participants bring something unique to the servicing market.
Mortgage Bankers versus Bankers
Bank management typically thinks about mortgages as one product in a package of products sold to consumers. Banks may not always like mortgages, but they must offer them to remain competitive. Each product helps anchor a customer to the bank. A customer who goes to a competing financial institution for a home loan becomes a marketing target for depository accounts, car loans and other affiliated products.
Banks constantly monitor and worry about local market share, their consumer footprint, employee costs and reputations.
Non-bank mortgage bankers, by contrast, tend to focus more on national market share while also sharing concerns over employee costs and brand reputation.
The mortgage servicing business can be challenging for banks and non-banks alike. The industry has many legacy IT systems that can be expensive and hard to configure. There are several third-party vendors who manage activities such as customer service calls, property tax payments, insurances, claims, payment processing, printing, property inspections and preservation. Tracking and monitoring the performance of those vendors is a never-ending task for servicers.
When managed improperly, all of these moving parts can create less than positive experiences for customers. When a non-bank loses a customer due to poor service, it loses one home loan. For banks, one unhappy mortgage customer can lead to the loss of multiple accounts and products.
Mortgage market participants’ underlying appetite for risk also colors their view of mortgage servicing and fuels movement into and out of the mortgage market. Banks tend to run away from risk, while private equity, hedge funds and even private investors tend to run toward risk and see it as a moment of opportunity.
As the mortgage market cycles favorably, banks go full force into mortgage origination and servicing. During market downturns, when servicing is especially challenging, we have seen them pull back from mortgages. In the past, it is during those tough times when banks exit mortgages that non-bank mortgage servicing has grown most rapidly.
Current Market Influences
Non-bank mortgage servicers are a necessary part of the mortgage ecosystem. They tend to be more entrepreneurial, nimble and innovative. Making decisions and implementing change is easier at a non-bank. They can adapt to market inflections and regulatory changes quicker and easier than banks.
Today’s investors have an appetite for non-agency, non-QM home loans, residential transition loans, and other unique products. Those companies that purchase or originate agency mortgages may not want to follow the servicing processes set by the government-sponsored enterprises or government agencies. Non-banks can offer investors more customized servicing and asset management options and solutions in response to new products and investment goals.
While there may be concerns that non-banks are less capitalized, have a bigger appetite for risk and do things differently than banks, those characteristics are actually strengths.
Without non-bank servicers, servicing costs would go up for investors and consumers, while the availability of mortgages would shrink. We need non-banks to be there when mortgages fall out of favor with banks, as they always do. Without non-banks to pick up the servicing, banks would just stop originating more loans during challenging periods because they need to limit the risk on their books.
Instead of viewing non-bank mortgage servicers as competitors to banks, we should view them as complementary market participants. Both have sound, logical perspectives that ultimately benefit consumers and the mortgage industry as a whole.