STRATMOR Group’s Michael Grad: Unlocking Profits from Servicing Assets
Senior Partner Michael Grad leads STRATMOR Group’s strategic advisory team, covering a wide range of consulting engagements to implement business growth strategies, process improvements and the use of advanced analytics and technology aimed at building competitive advantage. Grad has over 25 years of industry experience in mortgage banking, ranging from Fortune 500 companies to successful startups, including management of five end-to-end mortgage platform transformation programs. He may be reached at firstname.lastname@example.org.
With interest rates soaring, most lenders are struggling to generate enough profit from originations to sustain business. And when they are incurring losses with each loan originated, many have turned their attention to mortgage servicing rights for extra revenue.
For lenders that do, developing a robust servicing strategy has become a top priority. But questions abound. Should they sell the MSR when selling the loan, or retain it? And if they retain it, will they service loans in-house or use a subservicer?
Making the right choices is no easy feat. It requires addressing a plethora of factors and implications, including risk, direct unit cost for servicing, regulatory compliance, customer ownership, borrower satisfaction, current staff capabilities, as well as the investment appetite for MSRs. But perhaps the biggest challenge is how to begin.
The Four Quadrants Approach
When it comes to shaping an effective servicing transfer strategy, it can be helpful to break down the options into four distinct quadrants:
One: Retaining MSRs and In-House Servicing: Lenders manage all aspects of loan servicing, maintaining full control over the customer relationship and earning the servicing fees directly. However, it can be costly and demanding to maintain an in-house servicing staff.
Two: Retaining MSRs with a Subservicer: Lenders preserve the customer relationship while outsourcing daily servicing tasks to a specialized partner, reducing direct operational costs while still benefiting from the value of the MSR.
Three: Transferring MSRs to Another Servicer’s In-House Team: This provides an immediate capital boost, eliminates operational costs, and transfers compliance responsibilities, but relinquishes customer control and forgoes the long-term revenue stream associated with servicing fees.
Four: Transferring MSRs to Another Servicer’s Subservicer: Similar to the third approach, with the added advantage of avoiding the hassle of directly managing servicing tasks.
The Transfer Challenge
No matter which quadrant lenders operate in, the common thread in MSR management is the need for smooth servicing asset transfers. Transitioning from one quadrant to another involves moving servicing assets, a process that needs to be meticulously executed to prevent disruptions.
If a lender is transitioning MSRs from one subservicer to another, it’s a bit like changing a ship’s crew without creating any disruption to the passengers. For this reason, having a standard, detailed process in place can help lenders navigate transfers safely and accurately.
For instance, after making the decision to switch subservicing partners—perhaps due to costs, a shift in strategy or quality of service concerns—lenders first need to review their existing subservicing contract to determine the impact of ending the relationship. The next step, selecting a new subservicing partner, entails a comprehensive assessment to determine the potential partners’ capabilities, technology, expertise, service levels and finances.
After conducting due diligence and negotiating terms with the new subservicer, a clear roadmap needs to be created that details each step in the transfer process. This is followed by an equally detailed plan to communicate the new relationship to borrowers. To make sure there’s no customer confusion, every communication with the borrower should be prompt, straightforward, consistent, and evoke trust.
This is followed by actually transferring MSR assets to the new entity. It’s no simple task to move an enormous amount of private information, including personal borrower details and payment histories, from one system to another accurately and safely. After the transfer is complete, new processes must be monitored to determine if the new payment system and escrow management is working properly, or if there are any changes in payment patterns or an increase in delinquencies.
Finally, after making sure any issues are quickly identified and addressed, there’s the task of formally ending the relationship with the previous entity. This could involve settling any remaining financial obligations or perhaps decommissioning old systems and processes.
Post-transfer, rigorous monitoring is essential to ensure that the new payment system and escrow management are functioning correctly.
The entire process is a lot of work and may seem daunting. It’s usually best to consider working with a firm with experts who can guide you in selecting the best servicing approach and then to ensure any transferring of servicing assets goes off without a hitch.
Finding the Right Support
Identifying and executing a sustainable servicing strategy requires scrupulous planning and constant communication. The problem is that each lender has different goals and faces unique hurdles to its business, so what works for one organization may not work for another.
For example, one lender that chooses to retain MSRs may find it best to partner with a subservicer rather than absorb the extra costs of compliance and managing defaults with an in-house team. Another lender may find it best to invest in an in-house servicing operation to enhance customer retention and ensure borrowers get the highest level of service.
As for most business decisions, data is key. That’s why leveraging a third-party firm that has experience performing data-driven analyses that draw upon industry peer data is so important. By accessing peer data from similar organizations, lenders have the opportunity to forecast their servicing performance based on which of the four approaches they pursue.
With the right partner, a lender that shifts servicing strategies can obtain financial, technical and operational assistance that can significantly improve the outcome. For example, if a lender chooses to build an in-house servicing operation, a quality partner can help them recruit staff, choose the optimal technology system, and even help get their servicing operations off the ground. They can also help lenders ensure that any asset transfers are performed efficiently, accurately and compliantly.
In today’s challenging housing and mortgage markets, loan servicing has emerged as a vital tool for increasing revenues. While the path may be complicated, lenders don’t have to navigate it alone. With the right partner providing expert guidance, success is within reach.
To learn more, read Grad’s article on transferring servicing assets here.
(Views expressed in this article do not necessarily reflect policies 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 Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)