As the revenue generated from mortgage originations continues to decline, many lenders are exploring alternative ways to boost their income. Mortgage servicing rights (MSRs) have emerged as a viable option, especially as their value increases with rising interest rates. However, to effectively navigate the MSR business, organizations must adopt a well-considered strategy, says STRATMOR Group’s Senior Partner, Michael Grad.
In his article “Maximizing Lender Profitability: Transferring the Servicing Asset,” featured in the October issue of STRATMOR’s Insights Report, Grad covers the key elements that need to be addressed before getting into the MSR business.
“When your company is losing money on each loan you originate and the only revenue comes from the servicing rights, developing an effective servicing strategy becomes a mission critical priority,” Grad says. “Today, that strategy revolves around mortgage servicing rights (MSRs). The question lenders need to answer now is what to do with the servicing assets when they sell off their production.”
To answer that question, lenders must make two key decisions, according to Grad. Will they sell the MSR when they sell the loans, or will they retain the MSR? If they retain the MSR, will they service the loans in-house or transfer them to a sub-servicer to do that work for them?
Each of these decisions comes with its own consequences, in terms of dollars spent, who owns the customer and customer satisfaction. Determining which path makes the most sense can be difficult without objective data on the industry, the current value of the servicing assets and expected loan performance based on a review of peer data.
“The lender has several options available for the servicing of their loans, and the decision is not necessarily an easy one for the lender to make,” Grad says. “When STRATMOR is called in to assist in client executive teams, we use a fact-driven analysis, based on our experience in the market, as well as data from the PGR: MBA and STRATMOR Peer Group Roundtable program.”
STRATMOR employs a servicing quadrant analysis model. The results of this analysis help determine which quadrant of the mortgage advisory firm’s servicing transfer model a lender’s business currently falls and the benefits and disadvantages of moving into another quadrant.
If the lender decides to shift its business into a new quadrant, STRATMOR assists with the financial, technical and operational analysis to give the lender the best opportunity to succeed. If the lender chooses to bring servicing in-house, STRATMOR’s team can help the lender staff up, choose the right technology and then launch its new in-house servicing operations.
Servicing transfers present the biggest challenges to lenders, Grad says.
“Any change the lender makes in its business that involves the servicing asset is likely to involve servicing transfers,” Grad said. “Without seasoned guidance, the transfer process can be more complex than many believe and can lead to significant operational and technology challenges.”
Grad compares the transfer of servicing to a carefully choreographed dance involving financial, operational, and customer relationship management maneuvers. Each step must be executed with precision to ensure a seamless transition and to maintain trust in the mortgage ecosystem.
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