Editor's note: This story was originally featured in the February issue of DS News, out now [1].
As the new year gains steam, many mortgage servicers may be looking to fulfill their resolution to find new servicing opportunities to generate more income and grow their business. Expanding the scope of the servicer’s business by increasing the types of loans serviced or types of borrower markets served might seem to be the best approach. But in fact, it may actually be more lucrative for servicers to narrow the scope of their business by finding a niche. Identifying a niche in the mortgage industry that’s a natural fit enables the servicer to focus on and excel in a particular area of business, better catering to particular needs than if they were spreading their resources across multiple verticals.
WHY FIND A NICHE?
Today’s consumers are looking for more personalized service from their financial institutions. Finding a niche often creates a more personally relevant experience for borrowers, as resources and staff expertise are specialized to those borrowers’ specific needs. This introduces a positive point of differentiation that can attract more customers and open up further business opportunities for the servicer. Borrowers have the freedom to select who they use for their mortgage financing; however, many lenders do not service the loans they originate. This results in the servicing of the loans being transferred to someone else with no preference from the borrowers. In this case, a company (or lender) that originates loans and retains the servicing allows the borrower to control who they interact with from application through the life of the loan. Retaining the servicing also allows the servicer to provide the same level of personalized service their company may be known for, instead of handing the borrower off to another servicing company in which the borrower is one of many, and the call center staff relies on scripts for canned responses to customer inquiries.
Furthermore, catering to a specific need can also result in more operational efficiency and cost savings for the servicer as the company is able to focus its resources on a particular area of business. As a result, the time and cost savings are also passed on to the borrower, further improving their servicing experience. This also allows the servicer to focus staff training to a more confined space, allowing for greater expertise and services. The quality of service, and possibly the compliance, diminishes when employees must maintain working knowledge of a wide variety of loan types.
Servicers can identify their niche by analyzing their existing borrower market and business expertise. Oftentimes, there is a niche already present within the servicer’s current business model that can be further honed or that relates to relevant new opportunities. There are many types of niches servicers can fill, including loan type or agency-specific niches, borrower-specific niches, and cause-motivated niches.
WHAT ARE OUR LOAN TYPE SPECIALTIES? WHERE ARE THEIR NEEDS?
Niches are commonly defined by the type of loans serviced by the bank, credit union, or mortgage company. Luckily, there is a wide variety of specialized loan types for servicers to choose from, so nearly any business can find its niche.
Some product niches may generate more income from the different types of servicing income. For companies that portfolio their loans, this can include the interest income from higher rate loans. For example, vacant land loans used to purchase undeveloped property usually come with a higher interest rate and down payment, as the collateral is riskier.
Other niches may exist out of sheer necessity. Borrowers undergoing financial difficulties such as declaring bankruptcy or facing foreclosure have a more difficult time finding a lender willing to carry the credit risk. A lender originating and also servicing these types of loans has a special niche whether the loan is sold servicing retained or the lender portfolios the loan. There are also servicers whose niche is buying and servicing delinquent portfolios.
Default servicing can be a lucrative niche when servicers have qualified staff and utilize technological automation and resources to keep staff expenses down as much as possible. In Q3 2017, the delinquency rate for residential mortgages—including loans that are at least one payment past due but not in the foreclosure process—was 4.88 percent, according to the MBA’s National Delinquency Survey. Institutions that service delinquent loans earn revenue not only through servicing fees, but also through the collection of late charges.
WHAT BORROWER MARKET DO WE SERVE?
Another common type of niche is defined by the servicer’s customer base. Some servicers have a built-in customer niche. For example, credit unions serve borrowers working for a particular company or in a certain industry or living in a particular community.
On that note, borrower niches also often have a geographical component. This is the case for state or regional banks, credit unions, and mortgage companies. Their base is limited to customers who live in the geographic area in which the servicer operates.
While narrowing the scope of the borrower market served may limit the quantity of potential loans, it can often result in higher-quality relationships that will be more lucrative for the servicer in the long term. One of the main benefits is the overall relationship with the borrower and other products and services offered at the financial institution. With a smaller borrower base, servicers are also able to be more attentive to each individual customer or member and tailor their services to each borrower’s needs. Furthermore, since these servicers often have a geographic tie, they’re likely to be the preferred option for borrowers who favor faceto-face contact over online interactions and thus would need to be in close proximity to a physical branch.
Overall, catering to a niche borrower market often positions servicers to provide their customers or members with friendlier, more personalized, and more comprehensive service that leads to a better borrower experience and more invested relationships. Satisfied borrowers are more likely to return for future financial needs, leading to more business opportunities down the line.
ARE WE PASSIONATE ABOUT A PARTICULAR CAUSE?
Some servicing niches are philanthropic in nature and are geared toward furthering a certain mission. These niches generally also have a geographic- or borrower-focused component as they’re established to serve the needs of a particular community.
Many housing agencies offer affordable housing programs within their states to help develop, preserve, or sustain their area. Some agencies are even more specialized, such as those that serve native tribes. For example, The Housing Authority of the Cherokee Nation offers a number of affordable housing programs to the Cherokee nation, including low-income rental housing, rental assistance, college housing, and housing rehabilitation.
Rehabilitation loans are another example where a purchase is coupled with a renovation loan, or the renovation aspect is included in the purchase loan. Because of the expertise required with these types of loans, fewer lenders and servicers include this specialized loan in their offerings. Fannie Mae™ offers a product called HomeStyle® Renovation Mortgage for financing of home improvements in a purchase or refinance transaction of an existing home. Lenders who offer this loan product have the opportunity to sell the loans servicing retained, and with an investor for whom they are most likely already an approved seller/servicer.
Similarly, some banks, credit unions, and mortgage companies serve the niche of community enhancement loans. These loans are designed to provide funding to boost the economic development in certain areas by building affordable housing or new schools, improving infrastructure, or addressing other projects to benefit the community. These same lenders have the opportunity to serve the community by providing the servicing as well.
Often, new opportunities in servicing already lie within the servicer’s own walls. Servicers can start by looking at their existing products and successful markets to identify more opportunities to increase servicing revenue and sell other services or products within the company. By settling into their niche, servicers will be able to excel in their operations, while providing exceptional customer service, positioning them for the utmost business success.