Mortgage Subservicing: Finding the Right Fit

This piece originally appeared in the December 2022 edition of DS News magazine, online now.

In a recent Five Star webinar on the state of subservicing heading into 2023, Donny Atkins, Jr., Director of Servicing for The Money Store; Chris Sabbe, SVP of Sales for PHH Mortgage; and Seth Sprague, Director of Consulting Services for Richey May, discussed the challenges of managing a subservicer relationship, recent industry changes, what to look for in fees, and the pitfalls involved in transferring loans. With the mortgage industry contracting and questions still standing over how the likely impending recession will impact delinquencies, foreclosures, and other servicing-facing issues, here’s what Five Star’s panel of experts had to say.

All of the panelists said they were generally satisfied with their subservicer partnerships. Atkins noted that, when it comes to ensuring that a lender is satisfied with a subservicer, the first step is for that entity to have a clear and full understanding of its own business. Part of this, Atkins noted, involves working to make sure you don’t become a victim of the “sales cycle.”

“A lot of people are going to say the right things and help you form an opinion of your business. My organization had to go through this process a little over a year ago, and the first thing I did was call industry experts and say: ‘This is what I think my book looks like. These are what I think my needs are.’ Have a good partner to help begin your search.”

Atkins advised that lenders conduct their own research before seeking a subservicer. This means examining your organization’s customer service levels, technological capabilities, etc., as well as how those aspects of business can best be leveraged.

Then you can seek out a subservicer that understands and meshes well with your needs, rather than simply touting their own capabilities.

Atkins noted that The Money Store had entered a subservicing relationship with PHH Mortgage about a year ago, and he broke down some of the qualities that had convinced them that it was the right partnership for both entities.

“One of the differentiators was [PHH] spent as much time with us talking about our pain points and understanding why we needed to make a change and coming up with what I felt like was a customized plan to address those pain points.”

When it comes to having these conversations and doing this due diligence, Atkins noted that it’s easy to get what seems like good answers to the questions being asked, but to build the best foundation for success, those claims, and promises need to be backed up by clear data showcasing why a given partnership will truly benefit all involved.

Managing and Maintaining a Subservicer Relationship
“No matter how detailed your vetting process is, there’s always a learning curve,” Atkins said.

“[When you enter a new subservicing relationship], there’s always a point of not knowing what you didn’t know.” This, Atkins cautioned, is one of the reasons that a culture fit between the partnering organizations is essential.

“Our past partner was failing on customer delivery,” Atkins added, noting that this can damage both a company’s image and its internal morale.

“We expect the white-glove touch,” Atkins continued. “So when we made the switch, we made sure everything that was touching the customer had [that].”

Sprague recommended that lenders looking to forge a subservicing partnership should demand to see a live demo of how the subservicer actually works—not just, for example, a PowerPoint presentation.

“I can make really pretty PowerPoint presentations, but you want to make sure that the system is live and working,” Sprague said.

In addition to a live demo, Sabbe recommended communicating with not only the people who are servicing the loans but also the people who will integrate the system. They are equally essential in ensuring a smooth transfer between lender and subservicer.

“If you can’t get to that level, or your salesperson is unwilling to share that with you, those should be red flags,” Sprague cautioned. He added that it’s also important to have multiple contacts within the subservicing firm because the client manager may not always respond as quickly as needed.

‘A Seismic Shift’
Looking over the industry shifts that have unfolded in recent years, Sabbe spotlighted the increasing role of subserving across the mortgage landscape.

“One out of every three loans in America is now being subserviced. If you take out the top 10 banks, which mostly do everything in-house, it’s closer to one of every two loans being subserviced. That’s a seismic shift, particularly in the last five years.”

As the challenges facing the servicing of loans continue to evolve and shift, Sabbe noted that subservicers must keep pace, particularly in the areas of customer service and technology. Tech tools such as mobile apps, welcome videos, and investor portals can provide self-service options that subservicing stakeholders expect. Sabbe said that providing borrowers and homeowners with self-servicing options enables subservicers to save on costs, and, therefore, offer better pricing—a metric that could make all the difference when it comes time for lenders to choose between subservicers.

Sprague agreed: “Servicing has such a high fixed cost to it due to specialization, particularly when you start dealing with multiple investors (e.g., Ginnie Mae versus Fannie or Freddie). It’s a whole different skillset that you potentially need.”

However, Sprague noted that “the risks of being wrong now are far different than they used to be.”

The inherent risks involved may be a primary driving factor for some lenders to seek out a subservicer. Sabbe noted that PHH Mortgage has approximately 300 team members working in Risk and Compliance, the cost of which continues to increase.

“Taking undue risks at this time is just ill-advised,” Sprague said, “and servicing is one of those things, particularly when you’ve got Ginnie Mae [loans] or you’re dealing with natural disasters.”

Whereas previously lenders would look at pricing alone, which was difficult due to complicated fee structures, now lenders look at total cost savings or revenue generation they can achieve by switching from in-house servicing or from one subservicer to another, Sabbe noted.

Sprague admitted that the pricing structure can be complex depending on a lender’s needs. He compared it to a restaurant menu. One lender might want one thing on the menu, another will order sides (additional services), so the pricing will be different. There are many potential things to order.

One topic the panel delved into was what pitfalls might be involved when transferring loans. Some of the issues cited include potential customer impact, avoiding confusion around the timing of transfers—whether a scheduled balance transfer or a bulk transfer—as well as how RESPA requirements are managed. Communications and scheduling are crucial, Atkins said.

“Nothing is going to ever go perfect in a switch or a transfer. Have a mitigation, and you’ll be okay.”

Sprague cautioned that there might be some confusion due to changes in escrow balances when a transfer first occurs. He suggested that adding language such as, “Your escrow balances won’t be available until X date” into customer letters could help calm borrowers’ nerves and decrease the risk of worried phone calls. A personalized welcome letter or an intro video from the subservicer could also help stem some of the confusion, Sabbe added.

Beyond the Price Considerations
Sprague again stressed the need for a good culture fit when choosing a subservicer, but added that it’s also important to closely examine the cost structures involved. What subservicers offer in the base price may be different, and there may be more data or there may be more free reports.

“The borrower is going to be there for a long time, so you want to make sure they have a good experience, Sprague said. “Whether it’s prepaying or not prepaying, understanding that the subservicer

is treating them as their own customer is critically important.”

Sprague also suggested that lenders must understand what the subservicer can provide as far as “breaks on deboarding fees or boarding fees.”

When things become difficult or could go wrong, you also want to make sure your subservicer has the right protocols and is always reactive to the market, Sprague added.

Sabbe suggested that lenders shouldn’t just ask for a price but should instead ask for a comparative price. He also recommended asking questions such as “How do you manage your foreclosure attorneys? What are your timelines for traditional or nontraditional things? How quickly do you sell your RAL? At what value you sell your RAL?” Making sure you have a handle on this information will provide a better high-level comparison between subservicer options than pricing alone.

“It has to be somebody that you can work with to help grow your business,” Sabbe said.

Sprague said that subservicers provide value because they are more used to dealing with delinquencies than you may be from servicing in-house, as the subservicer may have a larger, national portfolio. No one gets paid when a loan is delinquent, Sprague pointed out.

“The more current that you keep your portfolio, the more cash you’re going to get,” Sprague said.

How Will FHFA/Ginnie Mae’s Nonbank Capital Rules Impact the MSR Market?
Sprague noted that FHFA had released revised capital rules before the COVID-19 pandemic, but said these rules had been criticized by some as being overly “punitive.” In January 2020, FHFA pulled those rules. Now FHFA has better aligned the rules, with several important differences on the Ginnie Mae side.

Sprague said that the rules involving tangible net worth and eligible liquidity were getting a lot of attention. “Entities with their Ginnie Mae servicing ticket are going to be under sort of new risk-based capital rules that are more bank-like,” Sprague said.

Servicers with more than $50 billion of servicing need to be rated, which Sprague noted would add further costs.

“My personal opinion is that this could have some impact on the MSR values,” Sprague added.

However, if regulators perceive that these capital rules are going to create undue problems in the marketplace for liquidity of servicing, they will adjust appropriately, Sprague suggested.

“Part of their stated mission is not to disrupt the market,” said Sprague.

The Big Picture
Sabbe recommended that lenders challenge their subservicing and other partners, particularly when it comes to areas such as performance, cost, and responsiveness.

“Be forward-thinking,” Sprague advised. “We’re going to have escrow analysis starting here. Property values are up. Understand the impact of your borrower, on what escrow shortages look like. Make sure you get in front of that as you’re sort of managing your mortgage business. Understanding where you might have escrow shortages that you’re going to need to float for 12 months. Work with your subservicer and understand when those escrow analyses are done.”

Sprague suggested keeping a close eye on production dating to April 2022 and beyond, pointing out that refinanced mortgages carry much higher interest rates now than they did a couple of years ago.

“Be a steward for servicing,” Atkins said. “Don’t get skipped over on that executive agenda, because we can make a difference to what’s going on in this industry.”