It’s done! The residential mortgage loan is successfully originated. And the credit union is now contemplating whether to portfolio or perhaps sell into the secondary market, service released or service retained.

With the service-released option, a credit union receives an “all-in” payment, both for the loan and mortgage servicing rights (MSR).

If the loan is sold service-retained, a government sponsored enterprise (GSE) pays the credit union at least .25 bps per loan (other investors may differ) to complete all servicing functions.

Now, the credit union must navigate the arduous task of completing all servicing responsibilities for the life of the loan.

Or, the credit union could gain tremendous benefits from outsourcing those tasks.

More than collecting the monthly payment

A comprehensive mortgage loan servicing division is responsible for administrative, compliance, and fiscal core functions, including:

• Loan administration. Customer service/call center, website, escrow, payment/payoff, and more.
• Default administration. Collections, loss mitigation, foreclosures, electronic default reporting (EDR), and more.
• Business administration. Quality control and quality assurance.
• Compliance. Federal, state, local, and investor regulations.
• Plus, client relations, investor remittance/reporting, risk mitigation, and more.

Why choose subservicing?

The benefits of subservicing are many (see sidebar). The assurance of regulatory compliance itself is worth the move to outsourcing.     

Often, misconceptions cloud the decision: “Too expensive...We know our borrowers best...Board won’t approve...We’ll lose control.”
These are all questionable assumptions.

What does a subservicer do?

A subservicer is a qualified outsourcing partner that performs all administrative, compliance, and financial servicing activities related to a mortgage loan for a monthly fixed per-loan fee. This includes all core functions mentioned above, plus standard and customized month-end reports; reconciliation and remittance to mortgage holders and investors; private labeling capabilities; and more.

The cost difference

Managing all costs and risk associated with servicing is critical. Unfortunately, calculating cost to service (CTS) is seldom performed and least understood.

To compare costs to service mortgage loans in house versus outsourcing, credit unions must consider: 

• “Cost to service per loan.” The per-loan/per-year in-house cost, calculated by dividing total costs by number of loans serviced.
• “Opportunity per loan.” What is most likely paid to outsource servicing, per loan and per year.
• “Estimated savings.” Amount saved by engaging a subservicer.
• “Economies of scale.” Per-loan savings subservicer realizes from the sheer volume of loans they manage.

A subservicer has a much lower CTS per loan due to economies of scale. The only way a credit union can match that cost is by servicing an equally large volume. Plus, a subservicer’s only focus is managing intricacies and complexities of mortgage loans. Comingling asset types, as credit unions do, creates many more servicing problems than efficiencies. 

In our whitepaper, we compare seven scenarios of servicing varying levels of mortgage loans in house. The estimated savings from subservicing are dramatic and convincing. Download the subservicing whitepaper.

Owning the servicing rights to a residential mortgage loan should ensure the credit union a solid ROI. The right qualified subservicing partner can help credit unions maximize the value of their MSR while enhancing service to borrowers.

PETER T. SORCE, CMB, is president and CEO of Midwest Loan Services.