Chris Sabbe of PHH Mortgage on the Subservicing Industry
Chris Sabbe is Senior Vice President of Enterprise Sales for PHH Mortgage. A recognized leader in the subservicing industry, he is responsible for managing and growing the company’s enterprise sales and actively onboarding new MSR/Co-Issue sellers. He can be reached at Christopher.Sabbe@mortgagefamily.com.
MBA NEWSLINK: The past year has been dynamic for the subservicing industry. What are some of the tailwinds driving growth?
CHRIS SABBE, PHH MORTGAGE: 2021 was a record year for subservicing. For the first time, total subservicing tipped the $4.0 trillion mark, according to Inside Mortgage Finance. This means about one out of every three mortgages are subserviced by a third party. Just five years ago, subservicing only accounted for half that volume at $2.1 trillion.
The growth across the entire industry has been staggering. In our shop, as of the second quarter of 2022, we added $79 billion in new subservicing volume over the last 12 months, bringing our total UPB up to $288 billion in overall servicing. And as MSR holders adopt the subservicing model – cheaper, faster, more tech-friendly, more compliant – the top 10 subservicers are growing to meet all the demand. One of our competitors recently landed a $100 billion+ account from a single client looking to exit servicing in-house. Subservicers have upped their game which is why you’re seeing this migration – particularly as the origination market contracts.
We believe there are several trends driving this growth: 1) the changing economics of servicing, 2) the heightened concern over compliance and 3) the strong desire to retain MSRs – where you’re seeing a number of new entrants. The main theme underpinning all this demand: our sector is simply doing a better job for clients. Of course, not all subservicers are created equal and there will always be some level of friction with customers – it’s just the nature of servicing, it’s a very difficult business. That said, the industry’s investment in consumer-focused technology is propelling a new movement towards self-service – the strongest preference among younger homeowners.
NEWSLINK: You mentioned that adoption of the subservicing model is growing, and the industry as a whole is doing a better job. Can you expand on this and give a few examples?
SABBE: The reality is that customers don’t really want to talk their servicer – and this is certainly the case with Millennials and Gen Zers. When they do need to talk to their servicer, it’s usually because they need help: their escrow details have changed, or they may have missed a payment, or maybe they needed something like a year-end statement for their taxes, they want to drop their MI, or need a payoff estimate as they look to refinance. Their preference is to not have to talk to anyone, and subservicers have adapted nicely.
The self-service model lets the customer manage their loan and interact with their servicer via their smartphones or their servicer’s website without having to hear a human voice, unless they want to.
Our entire industry is rolling out new tools like modernized borrower-facing websites, personalized videos, online chat, mobile apps, and streamlined IVR options – all in the interest of saving time and providing better service. Complaints are on the decline across some subservicers, as customers now have the most control they’ve ever had in managing their loan autonomously. Plus, the GSEs and regulators are challenging subservicers on their performance: reducing long hold times, shortening delinquency timelines, and improving the overall borrower experience. This is making customers happier (or at least less unhappy) and, at the same time, making subservicers far more efficient in driving costs down.
As an example, within a year of rolling out PHH’s new borrower portal and mobile app, we had more than 700,000 customers logging into it every month and adoption continues to climb as our customer demographics change.
That’s just on the B2C side. It’s happening on the B2B side with our MSR investor clients as well. Subservicers are routinely providing clients with more access to data, dashboards, trend analyses, and reports to help manage their customer base. Often times there is more transparency into their subserviced portfolios than if they were servicing the books themselves. These new “investor portals” allow clients to see the performance of their entire book – particularly around default, complaints, and other risk factors – to help manage both their customers and their subservicer.
The industry has put the power into investors’ hands: drill downs into loan-level detail, view the steps the subservicer has taken to get troubled homeowners into loss mitigation, or review actual borrower phone calls. As subservicing becomes more automated and more transparent, the industry has overcome one of the historical reasons lenders have hesitated using subservicers in the past – they don’t want to give up control. Now they have more control than ever before, as the trust factor in subservicers has risen in parallel.
NEWSLINK: What are MSR holders looking for when they switch subservicers? What do the economics look like and how long does it typically take to make a move?
SABBE: With MSR pricing at record levels and interest rates rising, CPR levels are slowing – making the retention of servicing so much more attractive. This is one of the few bright spots for non-bank mortgage companies that have held onto their servicing book – particularly during the pandemic.
These MSR holders are becoming more discerning. They are tiring of their traditional, one-size-fits-all subservicers and have really focused on three key components in making a move: 1) How can I minimize my transfer costs? 2) Can my new subservicing partner double as a MSR/whole loan buyer? 3) Most importantly, how can I minimize the disruption to my customers?
With originators tightening their belts, reducing their workforce and looking to squeeze every penny out of contracting origination volumes, they need subservicing transfers to be a lot less expensive. We’re seeing some subservicers beginning to waive certain transfer costs or more commonly, deferring costs for 12-24 months to make it inexpensive or even free to switch to a new subservicer. It’s all about just running the math on both sides.
Unlike traditional subservicers offering only a limited menu of options, the new wave of subservicers are also providing liquidity to purchase those whole loans or MSRs originators don’t wish to retain. If they like the bid, clients get the added benefit of not having to pay a deboarding fee when their native subservicer purchases these assets – a savings of a few basis points – critical in this market.
Finally, servicing transfers are all about keeping things easy. Reducing the overhead it takes to not only transfer the loans, but also oversee the book going forward has been paramount. One client recently told us that by consolidating their business to our platform (it had previously been with two subservicers), it has enabled them to reduce their servicing oversight, staff and expense by more than 60%. This meant they were able to repurpose these folks from fielding overflow complaint calls into other parts of the mortgage bank. When you’re paying a subservicer to do a service and you’re also paying your own internal staff to manage overflow complaints, you’re really paying twice. Our shop and others are attacking that problem head-on to reduce costs and headache.
In general, a good rule of thumb is that there are providers out there that can save MSR holders anywhere from 15-30% of annual subservicing fees – or up to $200K+ annually per $1 billion serviced. And these transfers are not anywhere near as painful as say an LOS conversion which can take 18-24 months. Standard subservicing transfers take about 90-120 days and the subservicer performs 80-90% of the work involved.
NEWSLINK: There have been some big wins and some headwinds for subservicers this year. Are they creating capacity issues?
SABBE: At the moment, there is still ample capacity in the subservicing sector. However, choosing a new subservicing partner is not just about can they do a good job for your portfolio today, but can they weather the storm of this market and will they even be around in another year or two?
In terms of actual capacity in the market, most MSR holders shouldn’t have an issue boarding loans to any of the major subservicers. In general, the average subservicer can onboard a new portfolio of 10,000-20,000 loans with no issue. Some have been architected to take on portfolios of up to 300,000 loans within 90 days. The one-off transfers where 700,000 loans moving to a single subservicer – this can take 6-12 months and can often put the subservicer on the sidelines for taking on any new business. The most important thing to look for in a subservicer is whether they are a fit for your business, your capacity, and your customers. Do they really understand you, your strategy, and your growth plans? Or do they just subservice all clients and all portfolios in a commoditized, homogeneous way?
NEWSLINK: Where do you see subservicing as an industry five years from now? What’s the potential attainable market share? Will automation replace “high touch?”
SABBE: Simply put, the economics of servicing today are making servicing in-house both risk and cost prohibitive, except for the largest of lenders. Non-bank lenders now control the majority of the servicing volume in the industry and these companies are fully reliant on their expert subservicers to manage their books.
The old objection to subservicing—lack of control and little transparency—is being solved through technology, advances in customer experience, and the evolving self-service model. And with special servicers curing defaults as much as 20-30% more effectively than in-house shops, originators are enjoying millions of dollars of loss severity savings annually, while keeping hundreds of thousands of homeowners in their homes. This can primarily be done by switching to a subservicing model, as many in-house shops are not equipped for fast, efficient loss mitigation.
Finally, our industry has been reminded again just how cyclical our business is, and subservicing has fortunately given new flexibility to originators. Lenders wanting to scale their MSR holdings up or down based upon the market or pure cash flow, are now empowered to do so without having to scale their workforces.
Given all these trends, the subservicing market share is quickly moving from one out of every three loans subserviced to one out of every two loans. It’s not a matter of “if” but “when.” We’re almost at the tipping point where originators are recognizing that subservicers really can service loans better, faster, more efficiently than in-house, and at a lower cost.
With automation, high-touch servicing, artificial intelligence and machine learning continuing to evolve into the norm, the future of subservicing is extremely bright. By 2030, the subservicing model could be so compelling that servicing in-house may be limited to a handful of mega lender/servicers with economies of scale. The remaining shops will either be subservicing or will still be believers that they can service it better or cheaper or in a more compliant fashion than the experts. My bet is on the subservicers.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)