Now that the first quarter is behind us, which is traditionally slower on the origination side of the house, mortgage lenders and servicers are shifting their attention back to the servicing side. While overall bank profitability was down over the past year, according to the MBA, net income related to mortgage servicing nearly doubled.
With originations expected to fall by the end of the year, as predicted by the MBA and more recently by Fannie Mae as well, lenders are now looking at bold new ways to solve servicing challenges to reduce costs and increase profits.
Having been a part of the mortgage industry for more than a decade, we jotted down some of the biggest concerns that servicers are facing today and the solution that can help them mitigate these challenges.
Continuing Compliance Pressure
There is no part of the mortgage lending business that is not subject to the continuing pressure from federal and state regulators. Even with the recent Dodd-Frank rollback legislation signed by President Trump in May, compliance will likely remain a top concern for the industry. It is anticipated that any regulatory slack offered by the federal government will be taken up by state regulators. This is especially true on the servicing side, where consumers are captive to the servicer and have no choice in how these firms operate.
State regulators are likely to start paying more attention as the nation’s largest banks continue to ease away from mortgage servicing to better comply with Basel III, as reported by Fitch Ratings. This has shifted portfolios to many nonbank servicers, in a big way.
In fact, Bloomberg recently reported that nonbank servicers now hold 51 percent of the nation’s mortgages in their portfolio. This is a concern for state regulators. as banks have been more heavily regulated in the past. The industry expects more scrutiny especially on nonbank servicers, which is likely to impact everyone on the servicing side.
The Cost Reduction Challenge
As operating costs continue to rise across the industry, it’s largely been the loan originator who has received most of the sympathy. With the cost to originate a mortgage loan nearing the $8,500 mark, it’s easy to see why. But servicers are also subject to increasing costs.
At a recent servicer roundtable hosted by Fitch Ratings, servicers in attendance pointed to four primary reasons for their rising costs: (1) compliance expenditures impacting performance; (2) compliance costs; (3) more state servicer reviews; and (4) trouble transitioning out of HAMP to other modification strategies.
Today, servicers are looking for ways to cut their operating costs without impacting their performance. It’s hard to do so on their own as these companies are typically not staffed to innovate in a manner that will help them overcome these challenges on their own. That’s why they are reaching out to third-party partners, but even that is a challenge.
Finding the Right Partners
A number of servicers have expressed difficulty in finding the right third-party outsourcing partners that understand both technology and process. Some companies specialize in putting more people on tasks that would cost the servicer too much to handle on their own and some firms offer automation to ease the servicer’s workload. There are very few that understand both.
Today’s servicing business is too complex to risk working with partners that don’t have the experience to know what the servicer really needs. Due diligence has never been more important, to create more opportunity for servicers that choose the right partners.
The smart servicer will look to leverage the right partners to help transform and grow their business during this optimal time. Their years of experience in the servicing business has given them the ability to choose technology that works for the mortgage servicing industry. This makes every interaction between the servicer and the third-party partner more efficient, lowering costs, and improving the servicer’s bottom line. Finding them will involve extensive due diligence, effective risk mitigation, and the will to settle for nothing less than full transparency and high efficiency.
Accessing the Best Technology
If there is one truth in the modern home finance business it’s that servicers and lenders cannot take technology out of their process. The lending operations are built on good technology, but with the fast pace of technological innovation, it can be difficult and expensive to keep up with the latest tools. Failure to do so can quickly put the servicer at a competitive disadvantage.
The high-tech software is a mission-critical tool for driving the advanced mortgage servicing machine. Whether its customer service, process automation, or analytics and data intelligence, employing the best technology is not optional in 2018. It hasn’t been for a long time.
Finding the right technology is a full-time job. Once the right tools are located, financial challenges become the critical consideration. Balancing capital expenditures (CAPEX) with operational ones (OPEX) (which will provide the lowest total cost of ownership) while ensuring a viable return on investment (ROI) once the implementation is complete is a massive undertaking. So many things can go wrong that many experienced executives shudder at the thought of installing new technology. By the time most companies figure it all out, they’re already behind.
RegTech is a special class of technology that more regulators and investors are finding important for the servicers they work with or oversee. This has made it critically important in this space and servicers know it. Everyone we have spoken with seems to be prepared to make the technology investments required to succeed, while at the same time lower their operating costs if they can find the right tools.
Servicing Success in 2018
While these challenges are expected to constitute the theme for servicers for the remainder of 2018, they are also the doorways to opportunity. Servicers are looking forward to having the breathing room to do the work of transforming their businesses, whether they are pursuing operational efficiency or zero tolerance full compliance.
When servicers really look at the businesses they are in today, and the environment they must operate in, it doesn’t make sense for them to spend their resources simply seeking the lowest friction, lowest CAPEX, and lowest OPEX in the hope of driving value. Instead, they should be focused on what really drives value in our business: compliance, quality, and customer service.
This is the time to seek out the expert partners that they can plug and play with to share that load.