Suggestions for how to weigh the pros and cons as you set or refine your home loan processing strategy.
While there’s no need to begin 2023 in a panic, the business of servicing mortgages is likely to grow infinitely more challenging in the coming year. Falling home prices and inflation have many housing market experts predicting a rise in defaults and foreclosures this year, and there are signs this trend has already begun.
No wonder a growing number of credit unions are considering a subservicing strategy to better manage their servicing costs. In fact, more credit unions are already leveraging subservicers, as NAFCU reported last year that subservicing has grown from less than 1% of mortgages in the 1990s to a $3.8 trillion industry in 2021.
Many credit unions I talk to are discussing whether subservicing makes sense for them. However, the decision isn’t always clear. How do they weigh the pros and cons? And what does a sound subservicing strategy even look like?
What Lies Ahead
The first step in determining whether to continue servicing mortgages in-house or utilize a subservicer is performing an internal review of your current servicing operations and how well your present strategy will meet future market challenges. A very important factor to consider is the outlook for the housing market and the overall economy.
In 2022, higher rates increased the value of mortgage servicing rights and helped many originators, including credit unions, offset the costs of loan production. In the meantime, mortgage delinquencies remained at historic lows, which kept servicing costs manageable. However, this picture will probably change in 2023.
According to the most recent outlook from the Mortgage Bankers Association, both delinquencies and foreclosures are expected to rise in 2023 and 2024 as the housing market cools. Such a development will inevitably add to the costs of servicing loans, especially if credit unions require extra staff to help members who are struggling to make payments.
Obviously, the economy is also a concern. While the labor market remains strong, inflation coupled with lower housing prices is likely to push the country deeper into a recession by mid-year. According to the MBA’s projections, unemployment is expected to rise from under 4% to 5.5% by the end of the year. Along with home price depreciation in many markets, more Americans will be under financial stress in the coming months.
Benefits of In-House Servicing
The largest and most obvious benefit of servicing loans in-house is that credit unions retain total control over the member experience. In fact, one of the biggest complaints I hear from credit unions about subservicing loans is that subservicers won’t deliver the same level of service that the credit union does.
Every great credit union puts its members first and wants to provide members with world-class service. That extends to everything they do, including how they service a member’s mortgage. How do you know a third-party will serve your members with the same passion? The reality is that you won’t find out until after a subservicer has your loans.
The business of servicing seems simple enough: collecting money, posting payments and providing information to borrowers when they need it. Where subservicers fall short is when a member can’t pay their loan and they become a debt collector. That being said, there are ways to be more personable in the messaging and make the experience as easy as possible for members, which can be achieved with the right subservicer.
Another risk with subservicing loans is that sometimes subservicers don’t add extra value and are no better at managing costs than credit unions. In fact, some have been more preoccupied with accumulating mortgage servicing rights than investing in the technology and infrastructure to service loans properly.
When more borrowers start demanding assistance, some subservicers won’t be prepared and may start cutting corners. This can lead to internal control issues, bad experiences for a credit union’s members and ultimately regulatory action by federal and state agencies.
The Benefits of Outsourcing Subservicing
While not all subservicers are built the same, some are quite capable of helping credit unions lower costs and stay out of the crosshairs of regulators while delivering excellent member service. Some subservicers even do their work under a credit union’s branding. This gives credit unions the ability to “own” the member experience and get all the credit when a member receives fabulous service.
Another key benefit of using a subservicer is that a credit union gains access to experts who are solely focused on compliance. That’s vital, considering the Consumer Financial Protection Bureau and other regulators have been ramping up enforcement efforts against wayward servicers. Ultimately, credit unions are accountable for compliance issues whether they service loans themselves or use a third party. An experienced subservicer with a strong track record of meeting servicing requirements can reduce these risks considerably.
This leads to the biggest advantage of leveraging a quality subservicer: Outsourcing allows credit unions to avoid the costs and effort supporting their own servicing infrastructure, which will likely grow in the year ahead. Servicing loans requires maintaining a dedicated, trained staff that inevitably stretches a credit union’s operating costs. When utilizing a subservicer that has already invested in this infrastructure and utilizes the latest servicing technology—including tools that can detect when borrowers may be at risk of missing payments—these costs can be dramatically reduced.
In fact, most mid-sized credit unions were never set up to service loans, collect mortgage debt, or be involved at all in loss mitigation activities. On the other hand, partnering with a subservicer with a strong track record of working with credit unions and providing an upgrade in financial technology ensures any credit union can continue to deliver a positive experience for its members in any market.
At the end of the day, the decision whether to service loans in-house is likely to weigh more heavily on credit unions in the months ahead. If you’re in that position, it’s important to think carefully about how your resources can be best deployed to meet the needs of your members, which may grow in 2023. It’s not time to panic, but it is time to start looking at these issues.
Allen Price is SVP/sales, marketing and client success at BSI Financial, Irving, Texas. A mortgage industry veteran with more than 30 years of experience in primary and secondary markets. His focus at BSI Financial includes loan subservicing, quality control, mortgage servicing rights acquisitions, and real estate business lines of operation for title and escrow, real estate and foreclosure, and default services through Entra Solutions. Before joining BSI Financial, Price was SVP at RoundPoint Financial Group, where he oversaw the company's sales and strategy. His background also includes SVP and national sales executive for ServiceLink's capital markets group and as SVP at Nationstar Mortgage, where he led the company's MSR and subservicing acquisitions. Earlier in his career, Price was a senior risk executive for BBVA's residential mortgage portfolio and an SVP for global structured finance and RMBS trading for Bank of America.