Rising property values and low interest rates pushed mortgage loan origination volume to roughly $4 trillion in 2021, the highest level ever recorded. Since then, the economic impact of rising inflation and interest rates has quickly changed the mortgage industry.
Now, lenders are facing the highest interest rates in a decade. In 2021, the average 30-year fixed mortgage rate was 2.65 percent. In early August 2022, the average 30-year fixed mortgage rate was 5.5 percent. These interest changes are increasing demand for Adjustable Rate Mortgages (ARM), with the MBA reporting that ARMs made up nearly 11% of all mortgage applications in May.
These rapid changes mean that mortgage servicers face new challenges, including supporting high volumes of new loans, and more loans that will have changing terms over the course of the loan’s life. By investing in the right mortgage servicing software, lenders can effectively meet those challenges and service their loans in-house. The right software can help servicers comply with investor requirements and create value for their organization and its customers.
Benefits of Selling Loans to the GSEs and Retaining Servicing In-House
Selling mortgage loans on the secondary market provides liquidity, freeing up funds for additional lending so lenders can serve more borrowers. Selling loans to investors also allows lenders to offer loan products they would not normally hold in their own portfolios, making more options available to borrowers.
Entities such as Fannie Mae, Freddie Mac, and private firms buy mortgage loans and package them into mortgage-backed securities. Fannie Mae and Freddie Mac, the two largest Government Sponsored Enterprises (GSEs), made up about 70% of the Mortgage Backed Security market between 2009 and 2020.
Approved Fannie Mae and Freddie Mac Sellers and Servicers have access to an array of products, services and support from industry professionals that equip them to better manage risk and improve liquidity. Selling loans to the GSEs offers many benefits, including
- Access to a wide range of mortgage solutions to meet borrowers’ needs.
- Clear, consistent pricing.
- Ease of doing business without a pre-purchase review or fees.
- Fast funding.
Working with the GSEs helps lenders originate more loans, save time and money, and expand homeownership opportunities.
Lenders who sell to the GSEs may choose to retain the servicing rights. Keeping servicing in-house benefits both lenders and their borrowers by generating servicing fee income, increasing cross-selling opportunities, and improving the customer experience. Well-trained staff using robust mortgage servicing software can service 700 or more loans per employee. Doing some simple math, using the average loan size in early August ($413,500) and the standard service fee of 25 basis points for the year, each servicing employee can generate more than $720,000 in annual service fee income alone. Ancillary income, such as late fees and commissions on optional insurance, increases the profits.
In-house servicing can also lead to more sales opportunities via more personal customer relationships. Lenders can become a trusted advisor to the borrower to help protect the asset and offer home improvement loans as well as options for home maintenance to generate additional revenue and provide a positive customer experience.
When servicing is done in-house, lenders can also provide the exceptional customer service that borrowers expect. Transferring servicing to another institution jeopardizes customer satisfaction. According to J.D. Power’s 2022 U.S. Mortgage Servicer Satisfaction Study, overall customer satisfaction and trust in the servicer drop when the mortgage is transferred to a servicer that is different from the originator. The originating firm that made the transfer also suffers, with only 15 percent of transferred customers saying they are “very likely” to consider using the original lender in the future.
Mortgage Servicing Software Automates Investor Reporting
To realize the full benefits of servicing loans in-house, lenders must invest in robust mortgage servicing software. Some servicers opt to service mortgage loans using the limited tools built into their core processing system. They may do this to save money and process the loans as internal loans like auto and personal loans, but mortgage servicing has specific regulatory and reporting requirements that demand specialized software. Core systems often have limited mortgage loan functionality, particularly related to investor reporting and compliance.
Mortgage servicing software automates investor reporting, making it easy for servicers to comply with investor reporting requirements and accurately report on the status of the loans in their portfolio. Servicers must regularly report payment and default activity to the GSEs. They must also meet the daily and monthly funding requirements, satisfy other specific reporting requirements, clear any discrepancies, and reconcile the custodial accounts. The leading mortgage servicing software platforms support all industry-standard reporting methods; produce reconciliation, remittance, delinquency, prepaid and balance reports; and perform advance and recovery of Principal and Interest (P&I) and Taxes and Insurance (T&I).
Mortgage servicing software should also integrate with other in-house software, such as the core system and loan origination system (LOS), to provide seamless data flow for every facet of mortgage servicing. To provide a strong customer experience, servicers should also provide digital loan access and web portals that enable borrowers to make online payments and access real-time loan information and statements. Single sign-on capabilities from within an institution’s own banking system provide additional convenience, security, and greater transparency between systems.
Technology drives every aspect of mortgage banking today, including servicing. By retaining servicing and utilizing the best mortgage servicing software, servicers can increase revenue while delivering better customer service that promotes borrower retention.
Susan Graham is president and chief operating officer of FICS (Financial Industry Computer Systems, Inc.), a mortgage software company specializing in cost-effective, in-house mortgage loan origination, residential mortgage-servicing and commercial mortgage-servicing software for mortgage lenders, banks, and credit unions. She can be reached at [email protected].