By Michael Grad July 2017
For many years, mortgage servicing operations have played a secondary role to sales and production operations in the organizational hierarchy of most mortgage lenders. Recently, industry focus has shifted as more lenders appreciate how a superior servicing operation — one that maintains a strong borrower relationship and delivers high borrower satisfaction — can enable lenders to charge lower interest rates, even if increased borrower satisfaction is the result of higher servicing costs.
The economic opportunities inherent in a superior servicing operation raise the stakes on the transfer of servicing to new providers and systems. STRATMOR’s experience strongly underscores the need for a standardized TOS process and methodology that is tightly controlled.
The Big Picture of Mortgage Servicing Operations In recent years, some of the industry’s focus and spotlight has shifted to mortgage servicing operations and cost containment for a variety of reasons, including:
For example, at a recent MBA Servicing Conference, CFPB’s former deputy director Steven Antonakes noted that:
[CFPB] will be paying “exceptionally close attention” to transfers …” There will be no more shell games where the first servicer says the transfer ended all of its responsibility to consumers and the second servicer says it got a data dump missing critical documents.”
Investors too, including the GSEs, provide additional oversight and requirements to servicers about financial soundness and operational performance. Indeed, investors can require the bulk transfer of servicing rights from the current servicer to another if the current servicer fails to meet financial strength requirements or otherwise performs poorly.
This is evident from the chart below in both the expense data (in orange) and the green trend line.
The coupling of GSE fee parity with historically low interest rates made retention of servicing rights far more attractive to many mid-size and smaller lenders as a long term-strategy or a means to store economic value for a rainy day when higher rates returned and originations slowed. Typically, such new entrants would initially administer retained loans via sub-servicers both to speed their entry into servicing and to avoid up-front investments in servicing infrastructure.
Near-term, we expect an increase in bulk servicing transfers as some of these lenders bring their servicing in-house while others sell servicing rights both to realize market gains in portfolio value and offset potentially lower origination income because of higher interest rates.
While hardly a new insight, there is also greater recognition on the part of both lenders and regulators that borrowers ultimately bear the cost of servicing their loan. All other things being equal, higher unit servicing costs reduce the value of MSR assets and therefore production profit margins unless lenders charge higher mortgage interest rates (which they do).
In the October 2016 issue of STRATMOR’s Insights report, STRATMOR analyzed how customer retention affects the MSR value of servicing. While most analyses of MSR value are limited to the expected cash flows over the life of a single loan, STRATMOR’s analysis of value calculates cash flows by considering the likelihood that the lender originates a new loan after the original loan pays-off., i.e. retains the customer.
STRATMOR’s analysis showed that at customer retention rates of 50 to 75 percent — achievable for a superior performing lender — the economic value of an MSR could be 33 to 50 percent higher than its value calculated without regard to customer retention. For a conventional agency loan, this could increase value by as much as 40 to 60 bps of the loan’s principal balance, about $900 to $1,350 for a $225,000 conventional loan.
The implications for servicing transfers are:
There is significant relationship value at stake when a large servicing portfolio is transferred from one platform to another. Given the points above and the current regulatory environment, leaders of servicing operations must establish a TOS process and methodology of transferring a borrower relationship in addition to the borrower’s loan data. It is critical to assure that such transfers are expertly performed in all their complexity.
STRATMOR’s servicing experience strongly underscores the need for a standardized transfer of servicing (TOS) process and supporting methodology that is tightly controlled. Whether the business justification for a bulk TOS is the purchase of a servicing portfolio, bringing a subserviced portfolio in-house or moving a subserviced portfolio to a new subservicer, the planning, organization and execution of the TOS consists of similar functions. The same processes, analyses, work tasks and management practices and activities do not need to be reinvented. Adopting a battle-tested TOS process and methodology addresses the multitude of variables, including loan volume, loan types, investors, the internal resources of the servicing transferor and transferee, the desired borrower experience and regulatory commitments. With this latter thought in mind, the remainder of this In-Focus article presents the overview of battle-tested STRATMOR Transfer of Servicing Methodology.
The chart below summarizes the STRATMOR TOS process in seven sequential stages and seven parallel work streams. All stages of the process are supported by cross-functional teams — typically seven to ten — staffed by team members of both the servicing transferor and transferee working in parallel under the overall guidance and direction of a transferee led PMO and supporting Transfer Command Center (TCC). On a daily basis, the PMO/TCC governs, guides, tracks, coordinates and integrates the efforts of the collective cross- functional teams. Critical to the TOS success is the disciplined and data-intensive planning and preparation. Central to a TOS launch is establishing a Program Management Office (PMO) and governance structure.
This up-front stage involves three key activities. First, conducting due diligence and discovery of both the transferor and transferee servicers to establish their current capabilities, strengths and weaknesses; in effect, to define the current operational state. Second, defining how the servicing transfer will be rolled out; how the total servicing portfolio will be broken down into discrete transfers plus the boarding of newly originated loans. Third, defining the scope, major tasks, timeline and key milestones of the TOS project along with identification of key implementation assumptions and risks. Borrower relationship touchpoints are also identified in this stage — points in the TOS process where borrowers will/may have communications with the servicer — along with any supporting IT components or supplemental work streams.
In this second stage, the transferee target state for the TOS and ongoing servicing operations is defined in terms of business requirements, including the data conversion approach and requirements for people, processes and technology. The differences, or gaps, between the current state and the transferee target state defines the requirements for development of a TOS Implementation workplan and roadmap, the major output of this stage.
Transfer Preparation and Development Preparing for a servicing transfer involves the development of detailed written transfer instructions.
These explicit instructions detail how the transferee servicing system should be configured to best receive the loan data, the specifications for both internal and external interfaces, training and staffing plans, Command Center protocols, and the routines and reporting for governing subsequent stages of the TOS.
Test plans and cases are critical to assuring a successful TOS. Consistent with the TOS design, the test plan will define the specific types of transfers to be tested, e.g., performing FNMA loans, what will be measured, including the borrower’s experience, what the expected results are and how the resulting servicing data will be validated and accepted as proof that the transfer was successful. The test plan will also involve the development of a TOS dashboard for tracking the progress of actual transfers.
Testing involves both execution of tests with test data and trial conversions of actual loans. Testing also serves as a live training ground for end-user personnel, providing the basis for finalizing TOS policies and procedures, and allowing for final user acceptance and sign-off.
Immediately following final user acceptance sign- off, the actual transfer of the servicing portfolio will start and rigorously follow the approved TOS methodology and workplan. Using the transfer dashboard, each transfer will be monitored by the Transfer Command Center.
Post-transfer evaluation and monitoring is conducted and managed by the Transfer Command Center. Each transfer is monitored constantly with respect to such key metrics as borrower calls, payment errors and complaints. While these metrics develop over time for each transfer, early results may be indicative of systemic problems or work load assumptions that may call for additional metrics or fine tuning of both processes and the transfer schedule.
Upon completion of all transfers, a comprehensive post-transfer evaluation is conducted to assess the effectiveness of the total transfer on key performance metrics and with an eye towards (a) remediating any process problems in future transfers and (b), taking follow up actions that may be appropriate to mitigate potential relationship and reputational damage with those borrowers who experienced problems and filed complaints.
STRATMOR’s methodology for TOS projects pinpoints that success:
At the end of the day, a TOS project using the STRATMOR TOS Methodology is a borrower centric, fact-based and disciplined servicing transfer as perceived by the transferor servicer, the transferee and, most importantly, the borrower.
From the borrower’s perspective, a smooth transfer should result in no interruption of service during the boarding period, e.g., receipt of payments, payment of taxes and insurance, customer service, etc., or errors regarding monthly payment amounts — principal, interest and escrow amounts — that would prompt borrower inquiries and complaints.
STRATMOR’s TOS Methodology for TOS was recently put to the test at a top-tier lender involved in the transfer of hundreds of thousands of loans from one subservicer to another. In this large bulk transfer, STRATMOR supported the lender’s executive steering committee and day-to-day oversight of PMO and Command Center.
For every Key Performance Indicator, the results of this TOS project were outstanding, with all indicators exceeding the targets established early-on in the project. Most impressive, out of the hundreds of thousands of loans involved in the transfer, under 200 borrower complaints were registered, corresponding to an extraordinarily low complaint rate of less than one percent.
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