Susan Graham of FICS: Retaining Servicing Provides Competitive Advantage to Lenders in Challenging Mortgage Market
Susan Graham is president and chief operating officer of FICS (Financial Industry Computer Systems Inc.), Addison, Texas, a mortgage software company specializing in mortgage origination, residential mortgage servicing and commercial mortgage servicing software for mortgage lenders, housing agencies, banks and credit unions.
Managing a profitable mortgage business can be challenging in the best of markets. When rising interest rates and plummeting affordability decimate loan applications, it’s even more difficult. Mortgage Servicing Rights are valuable assets for mortgage lenders when origination business is slow. Maintaining the servicing rights of loans originated by the lender is equally as important as those acquired through a purchase. Whether they are servicing loans held in the financial institutions’ own loan portfolio, sold to investors servicing retained, or servicing rights that were purchased, mortgage servicers must use all the tools at their disposal to expand borrower relationships and keep their borrowers in their overall servicing portfolio.
Servicing retention generates servicing fee income and helps servicers improve the customer experience. Modern loan servicing software automates investor reporting and compliance and creates a more efficient workflow, allowing servicers to effectively service loans in-house.
The Role of Servicing in a Changing Mortgage Market
During the last decade, the historically low interest rates encouraged frequent refinances and were one of the primary reasons for loan runoff in servicing portfolios. With interest rates rising, refi competition is much less of a problem. The interest rate on the average 30-year fixed mortgage rate, which averaged 2.65 percent in 2021, hit 7 percent in mid-November 2022.
Higher rates mean lower refi volumes, and that should be good for servicers. But lenders must also consider mortgage originator’s loan product innovation. ARMS, for instance, are now making a comeback. In 2021, ARMs made up only about 3% of the total loan origination market, but now the Mortgage Bankers Association reports that they are making up 7.5 percent of all mortgage applications.
But that’s not the only way loan originators are compensating for a more difficult market. Low down-payment programs are also rising in popularity. Originators are using them to help lower-income borrowers get into homes. There is still evidence that higher LTV loans with Private Mortgage Insurance are attractive to buyers who don’t have much money saved up for a down payment.
Despite high levels of forbearance programs during COVID-19, delinquencies were historically low at less than 4 percent in the third quarter of 2022. At the same time, all these surging loan products, which require different servicing needs, are on the table. Originators are having to work very hard to get new loans, but servicers must also continue to work to keep them.
The Increasing Importance of Borrower Retention
Keeping borrowers in the lender’s servicing portfolio offers several benefits, including increased profitability via servicing fee income. A well-trained servicing staff, equipped with the right software, can service 700 or more loans per employee. Doing some simple math, using the average loan size in early November ($389,400) and the standard service fee of 25 basis points for the year, each servicing employee can generate more than $680,000 in annual service fee income alone. Ancillary income, such as late fees and commissions on optional insurance, further increases the profits.
Servicing loans in-house significantly increases lenders’ cross-selling opportunities. These existing business relationships open the door for digital marketing of other products (e.g., credit cards, auto loans, CDs, etc.). Further, servicing done right creates a relationship in which the servicer becomes the homeowner’s trusted advisor. The servicer is then in a position to offer the borrower asset protection and other insurance products, home improvement loans, and options for home maintenance to generate additional revenue and provide a positive customer experience.
Taken together, these benefits add up to a powerful competitive advantage for these institutions.
Winning Customer Satisfaction Through In-House Servicing
Transferring servicing to another institution jeopardizes customer satisfaction. According to J.D. Power’s 2022 U.S. Mortgage Servicer Satisfaction Study, overall customer satisfaction and trust in the servicer drop when the mortgage is transferred to a servicer that is different from the originator. The originating firm also suffers, with only 15% of transferred customers saying they would be “very likely” to consider using the original lender in the future.
Once the decision is made to retain servicing, the institution must then provide staff, technology and processes based on best practices. Fortunately, today’s modern mortgage servicing software and web applications make it easier for servicers to provide the self-service tools and exceptional communication that borrowers—and the Consumer Finance Protection Bureau—expect.
Servicing software makes it easier for servicers to communicate proactively with borrowers, especially those who are still in the process of exiting forbearance. Effective communication consistently ranks high on the list of consumer expectations for their financial institutions. Better software makes it easier for servicers to meet CFPB expectations for borrower communication. Web applications provide easy-to-use online self-service tools, making it easy for borrowers to manage their own loans, giving them a sense of control and greater satisfaction.
Servicing Software Takes the Headache Out of Compliance and Investor Reporting
Mortgage servicing software is updated regularly to accommodate changing regulations and standards. For example, when the Federal Reserve transitioned from LIBOR to SOFR at the end of 2021, servicing software updates made it easy for lenders to integrate the new rate codes for various SOFR products, utilize an adjustment spread if necessary and modify legacy loans to SOFR specifications.
Servicers also need software that can automate investor reporting. Servicers must regularly report payment and default activity to the GSEs. These reports must include daily and monthly funding requirements, satisfy other specific reporting requirements, clear any discrepancies, and reconcile the custodial accounts. The leading mortgage servicing software platforms support all industry-standard reporting methods; produce reconciliation, remittance, delinquency, prepaid and balance reports; and perform advance and recovery of Principal and Interest (P&I) and Taxes and Insurance (T&I).
Another key to headache-free reporting is ensuring direct access to all loan data in the database. Although loan origination and servicing systems provide standard system reports, your business may require more custom reports to efficiently service loans. If so, you must have access to all your data and be able to extract data in a file format that allows you to conveniently customize reports and create files for other software integrations.
Seamless data flow, both into and out of a mortgage company, is critical to creating a high-efficiency enterprise. Data portability is critical. The best mortgage servicing software ensures full access, making it easier to migrate data to another vendor. This allows lenders to change software vendors if their provider goes out of business, if the provider generally restricts access, or if the lender’s needs change.
All of this explains why more institutions are choosing to service their own loans, and why modern servicing software is currently in such high demand. Servicing retention is key to customer retention and revenue at a time when the lender’s profitability may depend upon it.
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