GREENWOOD VILLAGE, CO – March 21, 2019 – Many mortgage lenders are struggling to strike a balance in their servicing and origination strategies, according to STRATMOR Group, a leading mortgage advisory firm. To thrive in the current environment, mortgage companies must have sound, long-term strategies that include an origination and servicing game plan, the firm advises in its March 2019 Insight Report.
Factors that affect a lender’s servicing strategy include whether to retain more or less servicing, the lender’s capital or cash standing, the accounting risks of servicing, and current and future mortgage policy. “Servicing today is not an easy road to navigate, and it requires having data-driven solutions to understand the current and potential impacts on your overall mortgage strategy,” STRATMOR Principal Seth Sprague, CMB, says in the report. “In this lending environment, having a clearly defined servicing strategy is imperative.”
One of the most common questions Sprague hears from lenders is whether he would recommend a lender retain more or less servicing. Sprague says the answer depends on a variety of factors, including the availability of capital for banks and cash for independent mortgage bankers. “Once the respective capital and cash hurdles are cleared, then lenders need to balance the benefits of servicing against the risks while also considering servicing’s fit within their overall mortgage strategy.”
For banks that own servicing operations, the challenge of maintaining servicing efficiencies can be a struggle. According to Sprague, there were negative financial and operational impacts to servicing before the 2008 financial crisis that most banks have gotten past, but they are still dealing with elevated servicing costs from pre-crisis levels. The ability to maintain servicing scale and efficiencies while controlling the long-term servicing costs presents an additional risk right now. For independents, retaining servicing and giving up the cash in today’s origination environment of lower margins and volumes presents the largest obstacle to invest in servicing.
“The ultimate decision to retain servicing and therefore create the mortgage servicing right (MSR) asset should be driven by the lender’s overall mortgage strategy,” says Sprague. “This strategy should include both a comprehensive review of originations and servicing operations and incorporate an understanding of the risk and rewards of servicing. And, these key decision points must be continually tested, evaluated, challenged and supported by current data and analyses.”
Whether a bank or an independent, all lenders must understand the potential risks of servicing. Sprague says it is essential for lender management to actively engage in understanding the servicing cash flows, the best practices around accounting and valuation, and MSR market conditions. In the report, he explains the accounting rules around the MSR asset, including fair value prospective accounting. He also explains co-issue and bulk market, the two segments of the MSR market.
“The accounting rules related to the MSR asset can create confusion as it represents large number of cash and non-cash elements that may seem to some like voodoo accounting,” says Sprague. “Understanding the potential risks of the MSR valuation process and its impact on the financial statements requires active monitoring by management.”
At the heart of the question of retaining more or less servicing is the lender’s relationship with the borrower, and Sprague listed ways to improve retention, including surveying borrowers to identify gaps or errors in communications, billing, billing methods and escrow expectations. “Good communication is the ‘make or break’ difference in a successful servicing retention strategy,” says Sprague. He pointed to a new article also in the report from STRATMOR’s MortgageSAT Borrower Satisfaction Program director, Mike Seminari, “Retain Your Servicing Customers and Their Referrals.”
In the section of the report entitled, “And Then There is Washington,” Sprague highlights potential policy changes being discussed by the industry ahead of the Mortgage Bankers Association National Advocacy Conference in April. While the MBA continues its efforts to obtain relief for the BASEL III MSR capital rules, Sprague notes that without a final and clear capital rule, banks continue to be impacted by the lack of clarity around capital. The next round of onsite meetings with regulators is scheduled for early April. “The servicing industry is waiting to see what changes the regulators will deliver,” Sprague said.
Click here to read the March 2019 edition of the Insights Report.
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