Co-authored by David Lykken, Managing Partner,  and Scott Woll, Director of Business Development, both with Mortgage Banking Solutions

We have all heard the expression, “Waiting for the next shoe to fall.” As it relates to the mortgage industry, we have had one “shoe” after another “fall”. It is something analogous to a centipede crawling across the industry landscape with an indeterminable number of shoes falling along the way. Could the next shoe to drop be in the area of loan servicing?

Mortgage servicers, not typically the owners of the mortgage loan asset, are the critical link between the mortgage borrower and mortgage loan asset owner.  For the servicer, the ultimate goal is to maximize the income on the portfolios they service. Over the years, technology and the performance (the strong performance of loans) has made this a lucrative, albeit a thin margin, business for mortgage servicers. Since most prime mortgages have a .25% servicing fee, while FHA/VA have a .44% fee and some sub-prime have a .50% servicing fee. If you assume a $150,000 average loan size, the average annual fee income per loan ranges from $375 to $750, which does not include other ancillary fees such as late charges or escrow credits. And according to a MBA report in 2004, the average cost per loan, due to all the new technology and performance, was about $80 per loan (and 1,188 loans serviced per employee), which results in a net profit of approximately $300 to $700 per loan.

But then along comes 2007 and 2008! One major area that servicers have always been responsible for is loss mitigation, foreclosures and overall delinquencies. As the tsunami of  delinquencies and foreclosures wash across the mortgage landscape, the loan servicing costs are dramatically increasing. Customer service representatives are being overwhelmed with an unprecedented volume of calls from consumers seeking help with loans they no longer can afford. To do their job effectively, servicers find themselves needing to hire more and more customer service as well as loss mitigation experts.  Servicing costs are skyrocketing and therefore net earning plummeting if not disappearing altogether.  Then along comes government intervention “encouraging” servicers to “work with homeowners”. 

So now servicers are at a dilemma, how do they balance maximizing net income and offer the best customer service that borrowers are expecting? Do they just follow the true meaning of the servicing contract, or do they offer the staff and service needed to handle the floods of calls, questions and ultimate answers that borrowers have?  And since the servicer does not have the last word of short sales or modifications and foreclosures, how long are answers ultimately getting to the borrower?

So what will happen next? Will servicers do the bare minimum required by the contract in order to maximize profits or will they offer the required customer service for borrowers which will cost more and thereby reduce profits dramatically, or will they require additional servicing fees per loan from the mortgage owners in order to maintain their profit margins, or will they ultimately get out of the business or go out of business? And then what?  While the ‘centipede’ continues its crawl, more shoes will no doubt continue to fall.  If you share “contrarian” tendencies as we do, it may be time to consider getting into servicing.   CALL US and we will have one of our experienced servicing consultants discuss if this is the time for you to consider getting into the loan servicing business. 

Mortgage Banking Solutions is the preeminent management consulting firm to the residential mortgage lending industry providing a host of consulting services including mortgage loan servicing… and much much more! 

MBS… your roadmap to success!    Phone number (512) 977-9900