Building Long-Term Value: How Subservicing Supports a Servicing-Retained Strategy

Chris Torres is vice president of business development at mortgage subservicer Dovenmuehle, Lake Zurich, Ill.

In today’s market environment, where origination volume is rebounding unevenly and profitability remains elusive, lenders are reexamining their long-term strategies. As recent data shows, the economics of servicing have never been more compelling. Retaining servicing is proving to be a viable path toward building a sustainable revenue stream and balance sheet strength, especially when supported by a qualified subservicer.

Yet for many, the prospect of pursuing a seller/servicer relationship with the GSEs or Federal Home Loan Banks can seem daunting. That’s where experienced subservicers offer tangible value—not as a shortcut to approval, but as a partner in operational execution, investor compliance and default management.

The Servicing Opportunity, Quantified

While often overlooked in a production-driven industry, mortgage servicing can provide a consistent and measurable stream of revenue, particularly when operating costs are carefully controlled and default rates remain low. According to MBA’s Servicing Operations Study and Forum, servicers earned an average $337 in net operating income per loan in 2024, a marked improvement over the $155-per-loan average in 2012. Contributing to this upward trend are higher average loan balances, elevated escrow earnings (roughly $42 per loan) and better cost containment, even amid rising compensation expenses.

Additionally, MBA’s National Delinquency Survey shows delinquencies remain historically low at just 4.04% nationally, compared to the long-run average of 5.2%, keeping loss mitigation expenses well below crisis-era levels. While servicing non-performing loans carries a cost, averaging just under $1,600 per loan, this risk can be offset by leveraging relationships with experienced subservicers that help maintain strong performance for the overall portfolio.

For lenders with the capital position and strategic vision to weather the upfront tradeoff, this approach enables the creation of a long-term asset: a mortgage servicing rights (MSR) portfolio that builds organizational value, provides liquidity options and enhances market competitiveness. According to MCT’s September 2025 MSR Market Monthly Update, recent bulk MSR trades for moderately seasoned portfolios with note rates below 5.00% have priced between 135 and 140 basis points (bps), equating to 5.4 to 5.6 times the servicing fee. Servicing released premiums (SRPs) also remain elevated, ranging from 15 to 25 bps above average fair value, driven by limited origination volume and continued demand from aggregators.

MIAC’s July 2025 Residential MSR Market Update further reinforces this valuation strength. The firm reports that buyers are willing to pay for recapture potential, even when sellers lack internal retention capabilities. In high weighted average coupon (WAC) segments, execution multiples showed as much as a 1.0×, or 100 bps, difference between portfolios modeled with 30% borrower retention versus those with none.

This data paints a clear picture: retained servicing can be a profit center. When structured correctly, it creates a durable revenue stream that enhances borrower retention, builds brand equity and improves the lender’s ability to reinvest in future originations. These favorable pricing dynamics reflect how the market currently values agency servicing rights and support the case for a well-capitalized servicing strategy.

Not a Shortcut, But a Strategic Step

It’s important to clarify what a subservicing relationship is not. Partnering with a subservicer does not automatically grant seller/servicer approval with Fannie Mae, Freddie Mac or the Federal Home Loan Banks. Each entity sets its own eligibility criteria, including minimum net worth and liquidity requirements, extensive servicing policies and procedures, and, for non-depositories, appropriate state servicing licenses.

That said, for lenders committed to achieving seller/servicer status, a subservicer can be a strategic accelerator. Engaging a qualified subservicer signals readiness to the agencies by demonstrating access to operational infrastructure that meets their specific expectations for borrower communication, default resolution, escrow management, reporting, and investor accounting.

Fannie Mae and Freddie Mac both permit subservicing with specific conditions. Lenders may delegate operational tasks but must maintain full oversight and accountability. The Federal Home Loan Banks’ programs similarly allow subservicing with prior approval while holding the lender responsible for compliance. In each case, a reputable subservicer helps lenders reduce onboarding friction, prepare for audits and build credibility with the agencies. Ultimately, the lender remains fully accountable and must maintain diligent oversight of their subservicing partner, reinforcing the importance of selecting a proven, transparent firm.

Core Functions Where a Subservicer Delivers Value

A skilled subservicer offers operational continuity, compliance assurance and strategic leverage in the areas that matter most.

Investor Reporting & Accounting

GSE and government investors maintain highly specific—and often evolving—requirements for how loans are reported, how servicing fees are collected, how payments are remitted and how custodial accounts are structured and reconciled. Even subtle deviations in timing, formatting or reconciliation practices can trigger costly exceptions or reputational risk.

A seasoned subservicer leverages technology platforms and internal controls purpose-built to meet each investor’s standards, from Fannie Mae’s daily reporting cadence and Freddie Mac’s remittance cycles to the FHLBs’ specific custodial arrangements. This includes managing timely principal and interest (P&I) remittances, escrow analysis and disbursement, custodial account segregation and investor reporting—all aligned to each agency’s specifications.

In an environment of heightened investor oversight and increased emphasis on data accuracy, having a subservicer with tested, agency-aligned processes reduces error rates, enhances transparency and ensures ongoing eligibility compliance.

Adherence to Agency Guidelines

Servicing agency and government loans is fundamentally different from managing portfolio loans. From default resolution timelines to borrower outreach requirements and loan modification waterfalls, GSE servicing is governed by highly prescriptive rules that change frequently and vary by loan type and program.

For example, FHA loss mitigation requires specific sequential steps with strict documentation, while Fannie Mae and Freddie Mac have their own distinct expectations around forbearance eligibility, payment deferrals and post-default borrower engagement. Missteps in these areas can lead to non-compliance findings, indemnification demands or even risks of potential servicing transfers.

Subservicers specialize in maintaining up-to-date servicing practices, staffing teams with agency-aligned specialists and integrating required changes rapidly, whether regulatory or procedural. This proactive compliance posture protects the lender and ensures borrowers receive appropriate and timely support throughout the delinquency lifecycle.

Regulatory and Audit Preparedness

In today’s regulatory climate, servicing compliance now demands more than written policies. It requires disciplined execution, clear documentation and the ability to withstand scrutiny. From CFPB scrutiny to investor file reviews and state servicing oversight, servicers are expected to demonstrate control, consistency and borrower-centric servicing outcomes.

Subservicers provide infrastructure that supports readiness for both routine and targeted audits. This includes:

• Document retention protocols aligned with regulatory and investor expectations

• Centralized records for borrower contact, workout decisions and communication history

• Automated alerts and workflows for tracking compliance deadlines

• Reporting tools that support agency and investor audits on demand

Subservicers also maintain dedicated teams that track regulatory changes, manage internal quality assurance/quality control testing and provide ongoing operational visibility. For lenders navigating a dynamic regulatory landscape, this support not only reduces operational risk but also builds confidence with counterparties, investors and examiners alike.

Building an Asset, Not Just a Capability

Retaining servicing isn’t just a functional decision. It’s a strategic investment. When executed thoughtfully, a servicing-retained model transforms routine loan administration into a durable financial asset. A well-managed MSR portfolio contributes to organizational stability, supports liquidity planning, and offers a meaningful hedge against origination market fluctuations.

A well-managed MSR portfolio delivers:

• Balance sheet strength through recurring income

• Liquidity flexibility via securitization or asset sales

• Rate-cycle resilience as a hedge against origination slowdowns

• Deeper borrower relationships that create cross-sell and recapture potential

With the right subservicing partner, lenders can access these advantages while minimizing operational risk, maintaining compliance, and scaling efficiently as their portfolio grows.

Not for Everyone, but Worth Considering

For lenders in need of immediate cash flow, selling whole loans will remain the right decision. But for institutions with a long view, particularly those seeking to expand their GSE footprint or better serve credit-diverse borrower segments, servicing-retained strategies offer compelling advantages.

Servicing isn’t a side project, though. It’s a long-term investment. For lenders exploring this path, a subservicer can be more than just a vendor; they can be a foundational partner. With the right support, entering the servicing-retained space becomes not just manageable but also strategic.

(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 submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)