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5 Triggers to Shift In-House Servicing to a Subservicer

Efficiency in mortgage servicing is vital, especially during times of significant change in the mortgage landscape. Changes in the market, such as interest rate shifts, regulatory alterations, or major economic events, can trigger a surge in mortgage applications, refinancing requests, or default rates. An efficient mortgage servicing operation is better equipped to handle these fluctuations, maintaining seamless customer experience, minimizing the risk of errors, and ensuring regulatory compliance. Moreover, operational efficiency can translate into cost savings, enabling servicers to remain competitive in a challenging environment in terms of service quality and pricing. In an industry where margins can be thin, the ability to swiftly and accurately process high volumes of mortgage-related transactions can make the difference between success and failure.

As such, efficiency should be at the core of any decision a lender makes when it comes to their servicing operations, and one of the most impactful decisions is whether their operations should remain in-house or be shifted to a qualified subservicer. This article will explore the five triggers lenders should keep in mind when deciding to shift from in-house servicing to partnering with a subservicer.

1. Portfolio Size and Composition

The loan count of a mortgage servicer is a pivotal factor in deciding whether to continue in-house servicing or utilize a subservicer. For servicers with a smaller loan count, in-house servicing can become uneconomical due to high fixed costs associated with staff, technology, regulatory compliance, and infrastructure, which may not be spread over a large enough volume of loans to be cost-effective.

On the other hand, servicers with a large loan count may find in-house servicing more viable due to economies of scale, where increased volume reduces the cost per loan serviced. However, in both cases, servicers need to consider other factors such as their core competencies, customer service quality, and ability to respond to market changes.

The fact is that there truly is no magic number that will tell a lender when they should flip the switch. From a purely economic perspective, it may not make sense to service your loans in-house until your portfolio is comprised of at least 250,000 loans. But there is more to consider than just the loan count.

The type of loans in your portfolio, the location you serve, the size of the loans, and your audience are all components that need to be kept in mind when considering making the switch. These factors all bring a different level of needed efficiency and type of expertise to the table and make servicing loans in-house more difficult.

For example, if your servicing portfolio is comprised of loans that bring more risk or require more touchpoints on the loan, your loan count “break-even” for in-house servicing may be much higher
than for your peers whose portfolio is comprised of different loan characteristics. Loan types that might fall under this category are loans that have a higher propensity for default, such as FHA loans.

Another factor for lenders to keep in mind when deciding whether to service in-house or outsource is the scalability of their operations in response to market fluctuations. Changes in the origination market can greatly impact loan counts, and the ability to scale up or down needs to be a driving factor. How nimble are your in-house operations if you have a sudden influx of loans? How will your customer service experience be affected by changes in loan count? These are questions lenders need to keep in the back of their minds. Therefore, while loan count is a critical factor, it’s not the sole determinant in the decision to keep servicing in-house or to outsource.

2. Technology Investments

Technology is crucial when deciding whether a mortgage loan servicer should continue in-house servicing or use a subservicer. Sophisticated technology is required to manage the complex processes of mortgage servicing efficiently and accurately, including loan administration, payment processing, regulatory compliance, customer service, and risk management. However, developing and maintaining such technology in-house can be costly and requires significant technical expertise.

Outsourcing to a subservicer with state-of-the-art technology platforms can be a more cost-effective and efficient solution for mortgage servicers without these resources. On the other hand, larger
servicers with the necessary resources may prefer to retain control over their technology, allowing them to customize and innovate according to their specific business needs and customer preferences. Therefore, the decision largely depends on the servicer’s technical capabilities, financial resources, and strategic priorities.

Cost comparisons between investing in internal technology or using an established subservicer can be challenging, as technology is evolving at lightning speed, and other factors need to be considered, such as the regulatory compliance components required and how the technology can affect the customer experience. Smaller lenders may not have the capital or infrastructure to manage their technological needs in-house and would benefit from the flat cost that comes with using a subservicer. The added bonus is that the subservicer has one line of business: to create the best possible platform for their clients and thus tend to invest significant capital to ensure their technology optimizes the experience.

3. Management Resources

Staffing and management resources are crucial determinants in the decision for a mortgage loan servicer to continue in-house servicing or to use a subservicer. Mortgage servicing involves intricate operations that demand skilled staff in areas like loan administration, customer service, regulatory compliance, and risk management. If a servicer lacks sufficient personnel or their management team doesn’t have the expertise to handle these functions effectively, the quality of service could suffer, potentially leading to reputational risk, regulatory penalties, and dissatisfied
customers. Conversely, a servicer with robust staffing and strong management could handle these tasks efficiently, maintaining customer satisfaction and regulatory compliance.

A subservicer can provide a viable alternative for servicers lacking in staffing or management resources, as they come equipped with a dedicated workforce and specialized knowledge at a price point that is significantly less than hiring full-time employees. However, outsourcing also means relinquishing some control over these critical functions, which may not suit all servicers. Hence, the decision depends on the servicer’s human resources capabilities, strategic priorities, and the importance of ensuring a quality customer service experience for the borrowers.

4. The Customer Experience

Moving to a subservicer may help your company save valuable time and money, but if it is at the risk of delivering a subpar experience for your customers, you should take a moment to reassess your position. A superior customer experience, characterized by clear communication, responsive support, and seamless digital interactions, can drive customer satisfaction, loyalty, and
referrals, thus directly influencing a servicer’s success.

In-house servicing may offer greater control over these aspects, allowing for customization of services based on unique customer needs and preferences. However, if a servicer lacks the resources or expertise to provide excellent service, customer satisfaction may falter, impacting their business reputation and bottom line.

Subservicers often have sophisticated customer support infrastructures and can offer a higher level of service. While outsourcing can reduce direct control over customer interactions, which may conflict with a lender’s business models or customer strategies, the best subservicers in today’s market understand the importance of a positive customer experience. Access to sophisticated communication outlets, such as chat features, 24/7 self-serve support, and Spanish translation, can elevate the experience for customers at a flat expense for the lender. Lastly, lenders will still have control over the ways the subservicer communicates with customers, creating a truly collaborative relationship.

5. Regulatory Compliance and Risk Mitigation

Mortgage servicing is a highly regulated activity with complex legal requirements at both federal and state levels, and failure to comply can result in substantial penalties and reputational
damage. Similarly, effective risk management is necessary to navigate potential financial and operational risks. If a servicer has the expertise and systems in place to handle these aspects, in-house servicing can offer better control. However, the risks may outweigh the benefits if they lack the necessary knowledge, infrastructure, or staff resources.

Subservicers, with their specialization and scale, often have robust compliance frameworks and risk mitigation strategies in place. Yet, outsourcing doesn’t eliminate a servicer’s regulatory obligations or risks entirely, as they still bear ultimate responsibility for compliance and are exposed to potential operational risk from the subservicer. While this may deter lenders from choosing to partner with a subservicer, it goes without saying that if the onus remains with the lender to remain in compliance with state and federal regulations, it makes sense to mitigate that risk by employing best practice tools available through the subservicer collaboration.

Lenders will need to determine a break-even point for compliance-related expenses to identify when the benefit of outsourcing will outweigh the risk of oversight, keeping the above factors in
mind. Another area to keep in mind is licensing—using a subservicer will allow lenders to typically service loans in all 50 states and U.S. territories without having to get the required licenses themselves. This can save lenders enormous time and expense while allowing them to grow without the setback of waiting to get licensing approval.

At the end of the day, the expense related to compliance and risk management is well spent if it comes with the assurance that they are leveraging the best knowledge of controls, best practices, and changes in the regulatory environment.

A Case for Subservicing

Choosing to subservice their mortgage loans can provide lenders with several strategic advantages over in-house servicing. Subservicers, as specialized entities, typically have established, scalable
infrastructures with robust technology systems designed for efficient loan administration, regulatory compliance, risk management, and customer service. This specialization can free the lender from investing heavily in complex servicing operations, allowing them to focus their resources and expertise on their core lending business.

Additionally, subservicers’ proficiency in handling regulatory changes and market fluctuations can mitigate operational risks, while their ability to provide superior customer support can help enhance borrower satisfaction. By leveraging the economies of scale, technical capabilities, and industry expertise of a subservicer, lenders can achieve cost savings, improve service quality, and enhance their overall competitive advantage.

About Author: Kevin Cooke Jr.

Kevin Cooke - LoanCare - 10.23.2023
Kevin Cooke, Jr., serves as the Head of Strategy and Business Development for LoanCare®. Cooke has 20 years of experience in the financial services sector, where he has developed a specialized talent for building collaborative solutions that deliver significant impact to the bottom line of both clients and service providers. At LoanCare®, Cooke is responsible for expanding lender relationships, building strategic partnerships, and driving business growth. Prior to joining LoanCare, Cooke was SVP of Strategic Partnerships for Auction.com. He’s also held executive roles at Altisource Portfolio Solutions, LenderLive, AMS Servicing, and Mortgage Outreach Services.

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