A rebounding economy and high-quality loan origination along with state-of-the-art-loan origination technology are making the mortgage servicing industry a new favorite. The mortgage servicing rights (MSR) are selling like hot cakes with many companies entering the fray. The servicing rights are high yielding and therefore, many banks, hedge funds and other investors consider them to be valuable investments. Industry watchers have found that many investors have increased their purchases of MSRs in 2015.
MSRs are rights purchased by third parties to service all mortgage payments for a fee. In an MSR sale, the lender transfers its rights to a third party which assumes all the administrative duties — collection of monthly payments, insurance costs, property taxes and allocation of interests and principle — and processes all the remaining payments. This frees up the lender to focus better on loan origination and new mortgages. In some cases, however, lenders continue to hold the MSR as the servicing income acts as a hedge when loan origination comes down.
But for many, there is significant risk associated with holding MSR. With the mortgage industry becoming complex with new rules and compliance statutes, there could be several hidden or additional costs. Therefore, many originators are seeking to keep servicing in-house as it reduces the compliance risk management burden. This captive solution is finding favour with many originators who are especially strong in certain geographical locations.
Third party originators require a highly professional organizational set-up with robust client management resources and sophisticated technology for reporting and data integration. If the size of the portfolio is considerably small, it makes sense to service the loan in-house. The staff can be spread across various areas to ensure proper servicing coverage. But with a bigger portfolio and larger size of loans, many lenders continue to opt for third party servicers.
Third party mortgage servicer should be a partner in a true sense. It is imperative that servicers adopt unique and customer-specific solutions with servicing practices and guidelines dictated by the investor. Here, a high level of flexibility is extremely important as it is essential for developing unique customer relations and a partnership that is entitled by the compliance environment. Mortgage servicing technology that ensures instant data access and transparency is key to a successful partnership.
The technology would also provide 24/7 access to the loan servicing systems with daily data exchange and upload. There is also the need for a dedicated client servicing manager with a clearly defined escalation process in place. Many lenders and servicers do have a robust service level agreement (SLA) with customized reporting and analytics. The monthly or quarterly report exchange and review should also be part of the SLA.
Even though the regulators have published guidance rules for third party servicing vendors which further add to the compliance burden, MSRs are still considered as high yielding and continue to be a hit among investors. With loan origination costs going north, companies are preferring in-house servicing which ensures additional cash flow.
Preethi vagadia is a business architect worked in Mortgage and Finance software department with top notch companies and has over 8 years of experience in Mortgage technology ,Business Mortgage Loan origination software solutions,mortgage management software etc. She has also worked in several process improvement projects involving multi-national teams for global customers in warranty management and mortgage.