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Warming Up to Subservicing Opportunities
As a new year gets under way, one thing is abundantly clear for credit unions ? the 2023 mortgage climate has moved to winter rather quickly, and chilly days lie straight ahead. A year ago, credit unions were pulling out all the stops to help members buying homes, lowering mortgage payments or requesting forbearance plans. Today, they?re focusing on keeping costs down while still somehow providing the type of personalized service that has made them an unrivaled option for home financing. It?s probably why more credit unions are now contemplating subservicing partnerships, among other reasons. And yet, the challenge remains ? how can you marginalize costs while ensuring that your members are getting their financial needs met?
Understanding the Shift To be sure, higher interest rates?sparked by a series of Fed rate hikes that may not yet be over?has nearly frozen mortgage demand. While the higher margins for servicing loans may be helping to offset origination costs, it?s increasingly likely servicing costs will rise in the future. One major reason why is the U.S. economy. While unemployment remains low and current job creation remains healthy, inflation has already hit the pocketbooks of many Americans, who are increasingly relying on credit cards to make ends meet. According to the Federal Reserve Bank of New York?s most recent quarterly report, credit card balances rose 15% over the past year. As more borrowers overextend themselves, many will have trouble making their mortgage payments. In fact, many housing market observers?as well as the Mortgage Bankers Association and Fannie Mae?project loan delinquencies and defaults will increase this year. This trend may have already started, too. Serious delinquencies are still near historic lows, but CoreLogic recently reported that the national rate for early-stage delinquencies rose from 1.2% in October to 1.4% in November. If this trend continues, it will likely result in the need for credit unions to hire additional staff to assist their members who may be experiencing financial challenges. Obviously, supporting the infrastructure to service loans and maintaining the proper staffing levels at a time when the housing market is undergoing a significant shift can be challenging. The fact that the Consumer Financial Protection Bureau (CFPB) has been closely monitoring mortgage servicers for regulatory infractions only makes this task more complex. Where the Risk Lies Given that many mortgage lenders?credit unions included?are already tightening their belts, it?s little surprise that subservicing is gaining popularity. According to NAFCU, subservicing accounted for $3.8 trillion in mortgage volume in 2021, roughly one-third of all mortgage debt. During the 1990s, subservicing accounted for less than 1% of mortgages.
However, because credit unions have a history of servicing their own loans, many are wondering whether subservicing is a right fit for them. It can be, but it depends entirely on having the right partner. The deciding factor for many credit unions revolves around their members and whether they will receive a world-class experience once a subservicer is in place. While lenders typically prefer a subservicer who will do the basic blocking and tackling, credit unions need a partner that is almost maniacal about providing the ultimate customer experience and enhancing their brand value. Fortunately, there are subservicers out there that specialize in credit unions, offer a private labeled experience, and have deep experience performing other services for credit unions, including QC work. By utilizing such a partner, the credit union receives the kudos for great member service without the extra costs and gains the confidence that all servicing work is performed in a compliant manner. By outsourcing servicing to a qualified partner, credit unions can also reduce their operational and regulatory compliance risks, and thus reduce their overall expenses. Even though many credit unions service their own loans, they were not set up to be mortgage debt collectors or operate in the loss mitigation space. By letting an expert subservicer with existing credit union clients handle these crucial functions, credit unions can focus their resources on growing their membership base and providing the financial products and services their members are looking for in today?s economic climate. I should also point out that servicing technology has evolved by leaps and bounds in recent years. Some tools can even predict when a member may be about to have trouble making payments before they ask for help. With the right subservicer, credit unions can avoid having to continually reinvest in this type of technology and leverage the innovations that a high-quality partner has already made. Choose Wisely Before choosing a subservicing partner, it?s critical to evaluate your current servicing operations with open eyes. Do you have the infrastructure, resources, and technology in place to see you through the current market shift? If the answer is ?probably not,? will your subservicing partner mirror the same member experience and instill the type of trust that you?ve spent years developing? While there are many subservicers out there willing to work with credit unions, most focus only on the nuts and bolts of collecting payments rather than the borrower?s experience. This often results in a rise in member complaints when someone is having trouble making payments and there?s loss mitigation work that has to be done. Of course, every servicer needs to meet federal and state guidelines for loss mitigation work, so they don?t have a lot of leeway when it comes to what they can and cannot do. But they do have some flexibility in creating a more personable approach, so members feel well taken care of and valued regardless of the financial challenges they are going through. The bottom line is there is risk in both servicing loans in-house and leveraging a subservicing partner. Indeed, some subservicers have been more focused on acquiring MSRs than building the type of operation that ensures loans are managed in a diligent and compliant manner or adding value to a credit union?s brand. There is no easy answer. But credit unions should know that there are quality subservicers out there that can help them lower costs, protect their brand, and treat their members like gold. And with the housing market continuing to evolve and more challenges lying ahead, the time to warm up to them may be right now.
About Author: Allen Price, senior vice president of sales, marketing and client success at BSI Financial, is a mortgage industry veteran with more than 30 years of experience in primary and secondary markets. His focus at BSI Financial includes loan subservicing, quality control, mortgage servicing rights (MSR)acquisitions and real estate business lines of operation for title and escrow, real estate and foreclosure and default services through Entra Solutions. Prior to BSI Financial, Price served as senior vice president at RoundPoint Financial Group, where he oversaw the company's sales and strategy. His background also includes SVP and national sales executive for ServiceLink's capital markets group and as SVP at Nationstar Mortgage, where he led the company's MSR and subservicing acquisitions. Earlier in his career, Price was a senior risk executive for BBVA's residential mortgage portfolio and an SVP for global structured finance and RMBS trading for Bank of America.