Mortgage Servicers are entrusted with almost all vital operations, ranging from payment collection to loss mitigation attempts. However, until January 2014, no strict regulations were in place to safeguard the borrower’s interest. In the upheaval of the last few years, both competitive pressures and the regulatory environment have changed this forever. If the industry has to flourish in the wake of the crisis, then it must embrace borrower-centrism as a core value.
Rise of the Mortgage Servicing Industry
Increased specialization: In 1980s, smaller mortgage banks found it was neither economical nor efficient in terms of capabilities and volatility of servicing to maintain their own servicing operations. At the same time, the large mortgage banks, most efficient in their servicing operations, found a new source of income through acquiring Mortgage Servicing Rights (MSRs). Originations have since become increasingly dissociated from servicing.
Growth of securitization: The increased securitization of mortgage loans also demanded better quality servicing operations because of the involvement of more entities in the mortgage market.
Recent Spurt in the growth of the servicing industry
More recently, the industry has grown even faster due to a number of uniquely post-crisis factors:
Capital Requirements: Introduction of Basel III capital requirements has forced the banks to sell their MSR which has resulted in the growth of dedicated mortgage servicers.
Greater investments in servicing technology: The need for upgraded technology was realized because with the increase in the portfolio of banks the number of delinquent loans also increased to a level where it became difficult to manage loan modifications manually
New regulations: New regulations by CFPB, OCC and FHA in the post crisis environment further made the servicing business difficult and complex to carry out
Need for borrower centrism in the post-crisis era
Introduction of CFPB regulations in January 2014 has made it imperative for the mortgage servicers to increase the borrower centric element in their services. Also, it is high time that the servicers increase their sensitivity towards the purpose of the business they are carrying out. Mortgage servicing is not only restricted to collecting payments from the borrowers but helping them out in times of distress. The moment this feeling of ‘servicing’ gets imbibed in the industry, no more regulatory persuasion from regulatory bodies would be required.
Propagating Borrower Centrism
Following are some of the steps that need to be adhered to if the servicers want to change the mortgage environment in the long run:
1. Investment in Technology: It involves development of a servicing platform which will incorporate the following customer-centric elements:
- The platform should be able to capture and maintain all information about the customer throughout the life cycle of the loan
- It should be able to maintain an automated and active workflow between various internal and external entities that are parties to the borrower’s case
- Incorporation of business rules in the platform will help in centralization of decision making and automation of decisions based upon prevailing business policy
2. Enhanced loan modification procedures: The servicers should follow a well-defined approach in case of a delinquent borrower. CFPB has provided very clear guidelines on completing a loan modification, but even more can be done.
3. Creating customer facing applications: This would provide the servicers with self-access via a website, mobile device or a telephone voice response system which will extend servicer’s ability to communicate with a borrower beyond the call centre.
4. Improving compensation for servicers: The “fee for service” model started by FHFA and HUD should be carried forward wherein the servicers would get paid a flat rate for performing loans, thereby encouraging them to keep loans current.
5. Development of Business Intelligence: This involves development of dynamic dashboards and reports so as to provide the management with immediate visibility into all activities underway as well as those that are complete.
6. Minimizing disruptions during servicing transfers: Many servicing transfers that take place between bank and non-bank servicers have a high percentage of distressed loans. Therefore, there is a high chance that a large fraction of the loans under foreclosure or loss mitigation are disrupted during these transfers, causing inconvenience to the borrowers.
A borrower-centric mortgage servicer stands to gain both credibility as well as a significant competitive advantage in today’s regulatory environment. The servicing industry is poised for disruption. When the industry has claimed back its rightful place as a key enabler of the great American dream of home-ownership, it will have been a rewarding endeavour.