Mortgage subservicing: What is it, and how can it work for my CU?

It’s done! You’ve successfully originated a residential mortgage loan and you’re contemplating whether to portfolio or perhaps sell it into the secondary market, service released or service retained.

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

If the loan is sold servicing retained, a government sponsored enterprise pays the FI at least 0.25 basis points per loan (other investors may differ) to complete all servicing functions.

Now, the FI must navigate the arduous task of completing all servicing responsibilities for the life of the loan—or gain tremendous benefits from outsourcing those tasks.

More than collecting monthly payments

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, etc.
• Business administration: Quality control and quality assurance.
• Compliance: Federal, state, local, and investor regulations.

There’s also client relations, investor remittance/reporting, risk mitigation—the list goes on.

Why choose subservicing?

The benefits of subservicing are many (“5 reasons to embrace subservicing”). 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.

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

To compare costs to service mortgage loans in house versus outsourcing, FIs 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 per year.
• Estimated savings. Amount saved by engaging a subservicer.
• Economies of scale. Per-loan savings the subservicer realizes from the sheer volume of loans they manage.

A subservicer has a much lower cost to service per loan due to economies of scale. The only way an FI 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. Co-mingling asset types, as FIs do, creates many more servicing problems than efficiencies.

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

Owning the servicing rights to a residential mortgage loan should ensure the FI a solid return on investment. The right qualified subservicing partner can help FIs maximize the value of their mortgage servicing rights while enhancing service to borrowers.

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