Mortgage companies that began to retain servicing or increased their servicing portfolios in 2020 are now faced with several areas of ongoing incremental risk, according to the April 2021 Insights Report from mortgage advisory firm STRATMOR Group.
In his article, “What’s Keeping Mortgage Servicers Awake at Night?” STRATMOR Principal Seth Sprague writes that many lenders that had retained servicing last year did so because it looked like the best decision at the time. “It wasn’t until the end of the year, or in the first quarter of 2021, that a few companies learned it might have been cheaper and easier to pay someone to take the loans when they were originated, especially in the instances where elevated levels of delinquencies or forbearance occurred.”
It’s vital that companies understand the quality of the loans going into their servicing portfolio before they opt to retain the servicing, Sprague writes. “Loading up a servicing portfolio with loans having FICO scores of 620 and below, 97% LTV, or FHA servicing that may be 10-15% in forbearance by the end of the year may not turn out to be a successful long-term strategy.”
For example, STRATMOR data indicates that somewhere between 20% and 30% of the loans offered to an aggregator are not immediately purchased due to issues or areas that need further clarification.
Companies that retained servicing in the hopes of selling MSRs at a later date may also learn a difficult lesson, according to Sprague, as fair market values determined by an independent valuation firm could be materially different than cash received from an actual bulk sale. This means sales “may take more effort than initially thought. More importantly, not all servicing may have a buyer, and certain products could be excluded from a sale.”
In addition, Sprague notes that servicing costs have risen and will likely stay that way until loans in forbearance are worked out. “Servicers must understand the true cash return on servicing and evaluate the cash implications of servicing in terms of offsetting the anticipated decline in origination income,” he writes. “Having a properly modeled, calibrated, and continually tested and verified view of the actual MSR cash return is critical to understand whether the best execution decision results in an adequate cash return.”
Yet another concern for servicers is what will happen when COVID-19 forbearance ends. “The new rules allow servicers to extend the forbearance period beyond 12 months, but to do so they must contact the borrower and verify the hardship. If they can’t reach the borrower, or the borrower refuses to allow the servicer to engage, the borrower will come out of forbearance,” Sprague notes.
On a positive note, unlike the last financial crisis, home property values are at all-time highs and the housing market is hot. “The folks in forbearance are in a better equity position than when they started,” writes Sprague. “With the appropriate servicing outreach and counseling, borrowers can sell their homes quickly, clear up their debt and everyone wins…if the servicers can make that connection with their borrowers.”
Sprague encourages lenders who decide to retain servicing to seek help if they need it, noting the Mortgage Bankers Association (MBA) is already working on the issues mentioned in his article and is a great resource.
Sprague also advises lenders working with a sub-servicer to make sure they are on top of compliance oversight. “People underestimate the size of the potential problem that could result from a lender who is new to a subservicing relationship doing a substandard job of compliance oversight,” he writes. “Regulators will have little patience for compliance mishaps. Responsibility will lie with the originator. There’s going to be enough money involved that we could see a fair amount of litigation before this is all over.”
In a second Insights article, “Connecting with Servicing Borrowers Key to Increased Retention,” Mike Seminari, director of STRATMOR’s Customer Experience Program, discusses ways lenders can retain more of their servicing portfolio over the long term. “Servicing retention rates across the mortgage industry were just 18 percent last year — and only 11 percent for cash-out refinances,” Seminari writes. “As recently as 2011, that number was closer to 50 percent.”
Seminari offers advice on how servicers can create more of a connection with borrowers to increase retention rates. For example, he advises mortgage companies to call borrowers, but not just to sell them. As refinance business slows in the next few quarters, he advises servicers (that also originate) to still reach out to customers as a sort of “servicing check-in.” It can be as simple as: “We want to make sure we’re doing everything possible to delight you as a customer, so that when you have a need, you’ll call us first.”