Despite the fact that many of the nation’s largest banks saw lower profits in the first quarter—compared to the fourth quarter of 2016—and that mortgage demand fell during the same period, industry surveys show lender confidence is high that 2017 will be a good year for home finance.
Setting the Stage
Part of the uptick in lender confidence may be due to the overall better performance they saw last year. According to a Mortgage Bankers Association (MBA) survey, independent mortgage banks and mortgage subsidiaries of chartered banks made $1,346 per loan on average in 2016, up from $1,189 per loan in 2015. While that’s still less than what banks were earning before the crash, the trend is positive.
On the servicing side, the trends are mixed. First, loans at least 30 days delinquent ticked down slightly in January, and seriously delinquent loans—90 days or more overdue—have fallen to just 2.5 percent of all loans. On the negative side, the cost to service seriously delinquent loans has skyrocketed, and servicers are warned not to consider shortcuts. In its most recent Fair Lending Report to Congress, the Consumer Financial Protection Bureau (CFPB) indicated that it will continue to scrutinize mortgage servicers.
In its report, the CFPB told legislators it would watch to see if delinquent borrowers were being discriminated against due to their race, ethnicity, age, or gender as they sought a workout solution with their servicer.
Finally—and this impacts both lenders and servicers—the cost of hiring and training expert personnel required in the mortgage industry has risen. The MBA found that personnel expenses averaged $4,801 per loan in 2016, up from $4,699 per loan in 2015.
While the industry seems confident that we’re seeing a strong recovery, even the most successful servicers are still working to increase efficiencies and margins while controlling costs. To that end, servicers may want to pursue a strategy that bundles previously disaggregated solutions—particularly collateral disposition, investor claims, and loss analysis.
The Costs of a Post-crisis Environment
Every analysis of industry operating costs and performance over the past decade revealed the same significant costs. These include the costs of acquiring servicing rights, personnel, technology, support costs (risk, finance, compliance, HR), overhead (occupancy, office of the CEO), as well as a small portion of the budget dedicated to ancillary services (primarily vendor payments and professional fees).
But since the crash, compliance costs have taken a much larger share of the servicer’s budget, and the costs of ancillary services—those functions typically outsourced to third-party vendors—have risen significantly.
A large list of new regulatory and investor requirements post-crash has contributed to the increase in compliance costs. The cost of noncompliance has risen so steeply and the regulator focus on the industry has been so intense, that servicers have been forced to spend more money in this area.
On the vendor side, once the CFPB made it clear that the servicer would be responsible for any compliance violation allegedly perpetrated by any of its vendors, the cost of vendor management went through the roof.
One area in which vendor mistakes can seriously impact the servicer’s compliance risk exposure is the collateral disposition or “conveyance” process. This currently disaggregated basket of services includes property inspection and preservation, hazard claims adjustment, and investor claims processing. Fortunately for servicers, these unique functions, which are generally outsourced by the servicer to a variety of vendors, can now become part of an aggregated specialty services strategy.
A New Kind of Bundled Service
The mortgage industry was introduced to bundled services decades ago when the industry’s largest title companies began offering menus of component back-office and field services generally tied to title and other products. Many offered these services in discounted bundles for servicers that committed to title or technology purchases. During the height of the foreclosure crisis, buying bundled default-related services helped lenders save money at a time when they were spending more on these services than ever before.
Unfortunately, not every servicer was satisfied with the quality of the underlying services, enabling smaller specialty providers to continue to do well despite intense competition from the large title company-based outsourcers. Finally, as regulatory scrutiny and the cost of service for these outsourcers began to climb—against an overall drop in default volumes post-crisis, to boot—the economics of these arrangements became less appealing.
A specialty services supplier, in contrast, focuses on quality first, differentiating itself from a categorical outsourcer. The larger specialty providers have also responded to the erosion of quality and price concessions on the part of title company-based outsourcers by offering suites of services that complement each other without the requirement that the lender purchase a complete bundle in order to achieve cost savings. Rather than holding servicers hostage for lower costs, specialty service providers build synergies that provide greater efficiencies to servicers without compromising quality standards.
The Perfect Fit
Traditionally, servicers have worked with a variety of vendors as loans moved through the default process into foreclosure and then for REO disposition or conveyance. While some functions made sense to bundle, most were handled by individual specialists. The notable exception was asset management, where a single large firm would handle property preservation, REO valuation, marketing, and disposition.
It has now become possible for servicers to pursue a combined-services approach for a number of functions in the conveyance process to effectuate “collateral loss mitigation.” These services include:
Hazard Claims Processing
Filing claims with hazard insurance carriers may seem straightforward—and can be—unless the property has a government-insured mortgage loan attached to it, in which case it becomes specialized work. This requires a well-trained staff, advanced technology, and the ability to collaborate closely with servicers and their other service providers, such as property preservation companies. When performed properly, servicers can reduce their loss severity significantly by filing hazard claims properly and resolving claims within statutory timeframes. This work also requires the company to employ licensed public adjusters, which puts it beyond the reach of most servicers and is therefore often outsourced.
Losses that the servicer incurs during the servicing of FHA-insured loans can be claimed from HUD, reimbursing the servicer for certain expenses and reducing overall loss severity. This can mean reimbursements for title fees, attorney fees, property preservation costs, and unpaid principal balance, but only if the party filing the claims knows how much can be claimed and does so within the required timelines.
Fannie Mae and Freddie Mac also offer a claims process to servicers which can return funds to the services as long as they file the claims within stipulated guidelines.
Servicers who choose to handle their own investor claims process encounter significant technology and staffing expenses, making this area a prime candidate for outsourcing to a specialty services provider.
Private Mortgage Insurance Claims
The vendor that the servicer chooses to file investor claims will also likely provide assistance with filing claims with private mortgage insurance companies. These firms have strict requirements that can cost servicers money if they fail to follow the guidelines when filing.
The Benefits of Bundling
A combined collateral loss mitigation strategy offers all of the benefits that servicers have come to associate with bundled services while ensuring consistent, high-quality outcomes throughout:
By combining the processing of a number of related services on the same, advanced technology platform, a specialty service provider can provide quality outcomes faster than a multisiloed approach. For example, although specific results will vary by servicer, we have seen a significant reduction in processing time when combining aspects of the hazard claims adjustment and investor claims management processes. In some cases, as many as 10 days are shaved off the overall claims process, saving clients hundreds of dollars per property on portfolios of several thousand loans, while also decreasing their risk of interest curtailments and other negative outcomes.
Lower vendor management costs
The costs of finding a vendor and performing due diligence on the proposed partner are significant and can add up to a large expense even before a service is ordered. Managing the vendor on a day-to-day basis, scoring the vendor’s performance, and then performing periodic audits of the vendor’s operation are time consuming and expensive for the servicer. Every additional function that can be performed by an existing vendor reduces the overall vendor management costs.
As servicers continue to formulate their responses to the post-crisis business environment, the imperative to reduce costs while ensuring quality outcomes remains top of mind. Due to the changing landscape, servicers now find that opportunities exist to outsource complementary services to specialty service providers, thereby enjoying the economic benefits of a multiline relationship without compromising quality. Particularly in the area of conveyance-related services, servicers have the opportunity to save money while improving effectiveness by partnering with a provider that can bundle hazard claims adjustment with investor and private mortgage insurance claims services.