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The rising cost of mortgage loan servicing

The compliance burden associated with recently enacted legislation is causing servicers to re-think their target operating models.

Overview

Changes in regulatory and compliance legislation, resulting implementation challenges and the increasing cost of servicing, are issues creating disruption in the mortgage servicing industry—and they have significant financial consequences.

But servicers can take steps to address each of these challenges, including:

  • Outsourcing to third party specialists

  • Upgrading technology

  • Implementing cross-sale innovations

Even with increased regulatory oversight and labor cost management, technology and innovation can improve operational efficiency and labor productivity.

Successful servicers will be those that establish organizations capable of scaling and creating economies of scale that generate sustained profits.

Background

A number of challenges are currently creating disruption in the mortgage servicing industry, and the implications of that disruption are having significant financial consequences.

Challenges include:

  • Regulatory disruption. New legislation and the rulemaking that has come in the wake of the Dodd Frank Wall Street Reform and Consumer Protection Act is the biggest catalyst creating disruption in the marketplace.

    Standard compliance requirements, all subject to Consumer Financial Protection Bureau (CFPB) audit, enforcement and punition include:

    • Periodic billing statements

    • Error resolution and information requests

    • Loss mitigation procedures

  • Downsizing trends. Basel III increased capital and reporting requirements may be contributing to the downsizing of “mega-portfolios” held by large lenders and their servicing operations.

  • Implementation challenges. Servicers have traditionally experienced less regulatory and compliance constraints and, therefore, have less dedicated and experienced infrastructure in place to monitor compliance. This implies new costs, with subject matter expertise that comes at higher salaries.

  • Emerging talent deficit. Talent retention within the industry has proven challenging. Many executives are leaving the industry to pursue careers outside of residential mortgage, where the scrutiny of federal regulators and investors is less intense.

  • Increasing cost of servicing. The cost to service a loan is rising. According to the Mortgage Banker Association’s (MBA) Servicing Operations Study, prior to the credit crisis, it typically cost servicers an average of $55 per loan per year. Today, experts estimate the cost to service at $208 per loan per year or more.

Analysis

What can servicers do to meet these challenges?

  • Labor arbitrage. Servicers can perform a comprehensive job task analysis to determine elements of their operation that can be outsourced to third party specialists who have the scale, global delivery capability and specialty expertise to perform operations more efficiently.

    Having internal teams collaborate with outsourcing teams helps servicers:

    • Acquire an objective perspective on their operations

    • Integrate best practices

    • Improve the quality and consistency of operational delivery

  • Technology upgrade. Automation is a means to save time, create operational efficiency and increase productivity. Removing human resource requirements from processes that can be automated reduces expense and frees servicer personnel for required customer engagement roles.

    Employing technology that allows borrowers to self-service also reduces fixed costs. Leading servicers are also deploying technology to provide compliance checks at every borrower touch point.

  • Cross-sale innovation. As the owner of the on-going borrower relationship, increasing a bank’s share of wallet through the marketing of incremental banking products and services offers potential value. Servicers who are actively monitoring their portfolios and using analytics to better understand customers’ buying behaviors can proactively approach a borrower.

Recommendations

Even in this age of increased regulatory oversight, mortgage loan servicing remains a business in which scale increases profitability. The servicers that succeed will be those that establish organizations that are capable of scaling and creating economies of scale that generate sustained profits.

Labor cost management, technology and innovation are essential to improving operational efficiency and labor productivity. Low cost operators will be able to invest in alternative revenue generating initiatives.

If you are looking for a more detailed road map for your business, please contact us.

Industry & topics highlighted

Financial Services Technology