While the options for distraught homeowners continue to grow and get plenty of attention, most people are not aware of the full effects this shift has had on maintaining the loans viability; in other words: Loan Servicing.
The fact is: ever-changing compliance issues and a plethora of late-paying borrower requirements have ushered in a need for greater attention to detail. For a Mortgage Broker trying to juggle servicing duties and finding profitable investments, an important servicing matter could be missed or they could see a loss of origination business to outsourcing Brokers with more time to focus.
As complicated regulations provide more options and rights to non-paying or late-paying Borrowers, Lenders or Brokers who service their own loans are responsible for keeping up with the ever-changing collection, reporting and foreclosure issues. Someone needs to wear the hats of Compliance Manager, Bookkeeper, Mediator and Collection Agent,
The changes, brought on by today’s economic environment, has caused an increase in the frequency of communication with Borrowers and the need for greater attention to what is addressed in these communications. Writing or saying the wrong thing, intentional or not, can be very costly and could jeopardize your rights in collecting on your loan.
With many Borrowers opting to walk away from their homes, reaching them via traditional means (phone, mail, fax or e-mail) has been more difficult than ever before. Many servicing companies have a specialized loss mitigation department to track down these hard-to-find Borrowers and get results, or at least answers.
Servicers have needed to add new responsibilities to further protect investments. Eighteen months ago they did not worry about collecting escrow impounds because there was not such a large group of non-paying Borrowers and many loans turned out to be short term. Now that we are faced with bundles of non-paying Borrowers, servicers are collecting impounds for taxes, insurance and HOA fees to make sure they are paid on time and protect the Lender. This culminates in more training time with upgraded software and more time spent making sure distribution amounts and payment dates are correct. If a minor detail is missed, it could be a major cost.
These demands are a major threat to the core business of in-house servicing Mortgage Brokers. Instead of maximizing profits, in-house servicing Brokers need to pay for staff and some level of servicing software. They need to study rapidly changing compliance issues, foreclosure laws, loan modification and short sale techniques. Someone in their office will constantly have a phone glued to their ear trying to hunt down late-paying borrowers, check on property tax and insurance payments instead of schmoozing new investors or locking in the next good loan.
In-house servicing worked well for most Mortgage Brokers during less complicated times. Mortgage Brokers wanted to keep close contact and – rightfully so - close control of their lender base. Brokers also enjoyed retaining the interest differential between what the borrower pays and what the lenders receive (the note rate/sold rate); this is often two or more percentage points and can add up to a nice monthly residual.
But what if there was a way to generate or keep servicing income, keep your client base safe and eliminate servicing work and overhead? Many Brokers are finding out you actually can. If you don’t know how it works, here is a quick explanation:
Private money brokers often times offer their investors (Private Individuals, IRA Administrators, Defined Benefit Pension Plans etc.) a return of X% on their money. These brokers are free to charge the borrower whatever the regulations and the market will bear. For example: ABC Pension fund is promised a 9% return on a loan; the broker has arranged the loan so that the borrower is paying 11%. The broker continues to receive that 2% note rate/sold rate differential throughout the entire course of the loan. If this loan is a $500K loan, the broker is generating $10,000 a year in “servicing fees.” If the broker outsources the servicing to a “sub servicer,” the broker would pay roughly $180 per year and keep the rest with little work and overhead.
Now, more than ever before, Brokers are electing to retain highly qualified, professional sub-servicers. These Brokers have been leaping ahead of their in-house servicing competitors; and in many cases still retaining a nice servicing spread.
Fortunately, there are a variety of professional servicers with solid reputations of integrity, making it easier for Mortgage Brokers to know that their clients will remain just that – their clients. Most servicers can easily track the note rate/sold rate fee and pay it out to Brokers along with the lenders’ proceeds once the borrowers’ funds have cleared a hold period. The Broker gets a monthly report and can track their income very easily just as lenders do.
For a servicing company, the complications presented in this new era are not too daunting. After all, servicing loans is their core business. A partner like this can cost as little as $15 per lender, per month, with a one-time $25 setup fee for basic servicing.
These companies usually have top-of-the-line servicing software and are staffed with professionals trained to meticulously service loans and keep up-to-date with changes in compliance issues. These professionals give the attention each loan demands and deserves, which often times helps avoid headaches in the first place.
A good servicer knows that their future depends on them keeping things smooth - not just between the Broker and Borrower, but also with the investors in the loan. This is a tight-knit industry; a good servicer wants you to talk about your experience!
Many Brokers have found that with the complications of today’s economy, the financially smart move is to join forces with a sub-servicer. It is not for everyone, but calculating the costs for software, hardware, staff and other expenses and comparing it with the cost of outsourcing will help Mortgage Brokers find out if it is for them. Many have already done so; and many have decided to eliminate their headaches and get back to what they do best – finding profitable investments – while still making money on their servicing portfolio.
Drew Louis is the president of Del Toro Loan Servicing, Inc. – he has been successfully servicing loans since 2003 and has over 20 years of experience in the financial services industry. Del Toro offers Doc Preparation and an arsenal of products for loan servicing including foreclosure and REO assistance. Call Del Toro at (619) 474-5400 or visit them online at www.DelToroLoanServicing.com.