David L. Dill
Mortgage loan servicers of all sizes find it a balancing act to manage cost controls, service levels, and compliance risk. Amid rising interest rates, the right balance is essential, because even incremental rate changes can jeopardize the long-term viability of a servicing operation.
In the years following the financial crisis, the servicing community was challenged to meet increased state and federal compliance requirements. Focus on servicers’ costs was basically non-existent, as new regulations required transforming every process, overhauling technology, and retraining staff. In recent years, the pendulum has swung back to focus on operational efficiency, stability, and profitability.
At this point, the mortgage originations market has been enjoying year-over-year success. This success increases the opportunities for originators to retain mortgage servicing rights (MSRs) and provide servicing solutions, as potential profit centers. Many mortgage originators have created servicing divisions, while established mortgage servicers are seeing growth via consolidation.
In each case, though, the prospect of cash flow issues and other problems remains ever-present, as the market continues to change, and this reinforces the importance of cost control initiatives.
There are multiple structures for servicing operations, but the following are predominant:
- Portfolio Servicers—Originators that retain MSRs
- Third-party Servicers—Buyers of MSRs or subservice organizations
- Hybrid—Portfolio servicers, as well as buyers
- Special Servicers—Those focused on distressed assets or re-performing loans
There are advantages and risks associated with each variation of servicing in each structure:
Any of the above structures requires a complete end-to-end solution to meet regulatory requirements, pass government audits, manage reputational risk, and contend with the growing social media presence of customer service ratings.
Most servicers rely on standard solutions today with key milestones in their process. Successful organizations will take that standardization and optimize it via technology solutions and controls, based on increased reporting metrics and indicators tied to accounting systems.
To provide a framework, the Mortgage Bankers Association has established industry cost measures defined by “performing” and “non-performing” loans. Performing costs include the operational areas of customer service, loan boarding, payment processing, investor reporting, and technology. Non-performing costs include collections, loss mitigation, foreclosure, bankruptcy, unreimbursed real estate owned (REO) losses, and other default-specific costs.
The opportunity for servicers to manage costs is directly tied to addressing the above processes in six respects: servicing oversight, change management, time line adherence, technology integration/optimization, vendor management, and report repository consolidation. In each case, establish the expected time to deliver compliant work efforts.
Servicing Oversight can be broken down into several components, including:
- Management and Infrastructure Review. Analyze whether departments are layered correctly, with appropriate span of control and with actionable work responsibility to support the targeted work performance.
- Process Review. Assess whether policy and procedures are tied to actual work performed and validate that defined work is being completed by the assigned teams.
- Time Study. Validate a baseline to complete tasks within service level agreements (e.g., call center calls per hour and average handling time).
- Production Targets. From the data derived, establish metrics around loans per full-time employee.
- Modeling Tool. Design department-specific models, based on volumes and loans per full-time employee.
Effective modeling, for scenarios in which the company scales up or down, can help plan action to retain quality teams and move with market changes.
Change Management enhances the ability to manage costs by reducing self-inflicted errors. For example, designing the intake process for changes and conducting associated cross-functional impact analysis will reduce financial errors and poor customer experience. Additionally, establishing post-change compliance testing will reduce audit compliance exposure while also improving efficiency.
Time Line Adherence related to foreclosure and conveyance are large areas of opportunity. Errors in the beginning of a process can be costly at the liquidation of a loan to an investor, since charges are applied for servicers’ errors. Embedding key milestone measures into reporting and controls will allow a forward view to mitigate risks and penalties.
Technology Integration/Optimization—The largest cost for an operation often falls under technology support, and changes require extensive time and resources. However, a “work around” can end up costing more than a change.
- Workflow Review. Are systems being utilized to their best ability?
- System Documentation. Address data integrity, customer/investor satisfaction, and compliance with regulatory changes.
- Business Partner Integration. Vendor interfaces require data verification, and cost saving techniques include management flash reports and vendor score cards.
Vendor Management Programs should be robust. All third-party vendors’ daily work performance should be evaluated, with scorecards that identify variances, escalations, and quality rankings.
Report Repository Consolidation establishes a process for ad hoc, recurring, and new report requests to be sourced from one consolidated database. Create a prioritization ranking and ensure that a steering committee approves new reports. These steps can mitigate the efficiency losses that every organization suffers from proliferating data solutions across multiple departments.
Mortgage servicers are more focused today on cost control, having implemented a wave of operational and compliance measures required by regulators in the wake of the financial crisis. Reinforcing controls has become even more critical in view of rising interest rates. Addressing key areas, such as change management, can help ensure viability in a changing market.
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Treliant, LLC, Compliance, Risk Management, and Strategic Advisors to the Financial Services Industry and Consumer-Oriented Businesses, brings to you New Coordinates, a quarterly newsletter offering insights and information regarding pertinent issues affecting the financial services industry. This article appeared in its entirety in the Fall 2018 issue. To subscribe to our quarterly newsletter, please Contact Us.