Mortgage loan servicing is a great business when nothing changes. If borrowers continue to pay every month as agreed and they remain in the portfolio for many years, a good loan servicing shop will do very well. We haven’t seen those conditions in quite some time.
It started in the late 1990s when rates began to drop just as mortgage investors began to get creative with loan program offerings. By 2003, rates had fallen farther than anyone ever thought they would. There were so many loan programs that any borrower who could fog a mirror could refinance a home, and first-time homeowners were courted liked high rollers in Las Vegas.
These were tough times to be a servicer. By the time the new loan was completely boarded, the servicer often had only six months worth of payments to collect before the borrower was refinancing again, often in order to take equity out as home prices rocketed skyward.
Of course, all of that ended in 2007 when subprime and Alt-A borrowers began to default in record numbers and mortgage-backed securities were trading at about the price of toilet tissue.
This was an unhappy time for most servicers as well, as they struggled to deal with a wave of delinquent borrowers that would culminate in the robo-signing debacle and the foreclosure crisis.
This is not to say that servicers didn’t make money during the financial crisis. They did. But many of the practices that they used to stay in business eventually drew the attention of federal regulators and attorneys general across the country and ultimately led to the largest public-private settlement in U.S. history and a deal now monitored closely by the Office of Mortgage Settlement Oversight.
In the mortgage servicing business, volatility is the enemy. Change equals pain. And even though today’s servicers have learned a lot about dealing with portfolios under stress, many servicing executives would welcome a bit of “boring” back into their lives.
Some of that may actually be returning now, as the nonjudicial states have mostly worked their way through foreclosure backlogs and the judicial states continue to slowly grind their way through their own. Now, for many servicers, the new source of portfolio churn isn’t default, but rather the old source of runoff: prepayment, as borrowers work their way into better loans.
“We have been focused on portfolio churn for the past few years,” said Dave Worrall, president of RoundPoint Mortgage Servicing Corp., Charlotte, N.C.
Worrall runs a thriving special servicing business, but the company also owns a loan origination subsidiary. He says the rate volatility we’ve seen this year has created refinance opportunities for more of his servicing customers. This has made portfolio churn an issue again. And just like that, we’re back in 1999.
Back then, “93% of purchase money borrowers did not stay with their portfolio lender when they refinanced,” recalls Steve Kropper. At the time, he was leading an effort to develop the first consumer-facing automated valuation model, or AVM, tools at Domania in Boston to give banks some warning about when their borrowers were ready to leave the portfolio. He went on to start Bank on Real Estate, a firm that uses MLS data as bait to catch borrowers before they leave the portfolio.
“That’s a 7% retention rate,” Kropper points out. “And much of that 7% was either accidental or wholesale production that returned to the books.”
That may be history, but Kropper doesn’t see anything in today’s marketplace that will change anything. “I don’t think the product mix of today, nor the changed channel [all bank-owned channels] will affect retention,” he said. “The reason is that lenders make no attempt to intercept the purchase borrowers upstream of the Realtor.”
Kropper’s data suggests that while real estate agents say they will partner with a bank, they actually divert 90% of the business they touch away from the original lender. By the time the Realtor has control of the borrower you can consider them gone.
So what can a servicer do to stop portfolio churn? Worrall says it comes down to serving the customer. “The [financial] crisis has certainly contributed to the focus on customer service. The solution comes down to all of the basics of customer service that you would expect.”
But also some that you might not expect, like the telephone system. Because customer experience management is first on Worrall’s priority list, he did away with the company’s interactive voice response telephone system.
“When people call you, they want to talk to a person,” Worrall said. “They view that as a very important aspect of customer service. We’ve increased the training that is given to our customer service associates. There is an industry trend toward one call resolution and we’re moving toward that goal. No more ‘just call us back later because we have to do the research.’”
Fortunately for RoundPoint, the company has one foot in special servicing, which provided a training ground for developing the skills the firm is using now to try to hold on to performing borrowers.
“Half of working with a borrower that is in distress is providing them with a good level of customer service so you achieve that dialogue,” Worrall said.
“We were able to naturally transition the skillset that we used for special servicing over so that we can provide a high-level customer service to performing borrowers.”
Servicers that don’t develop this skillset will lose out, Worrall says. “It goes back to offering a very high level of customer service,” he continued. “Servicers have to put the service back in servicing and not treat the borrower as an asset that’s stuck with them. You have to earn that servicing fee. Good shops have realized this and are working to provide that value. We’re creating and maintaining a relationship, a service, not just an asset on the books.”
When portfolio runoff comes from borrowers who choose to refinance, the servicer is dealing with a consumer who is taking an active role in his or her financial destiny. Those consumers are looking for one of two things — or possibly both — to reduce the cost of borrowing the money they need or to improve the level of customer service they are receiving from their financial partner.
“We’re doing everything we can to offer a level of service that guarantees we won’t have to be as elastic on price,” Worrall says.
As for the question of whether these new opportunities borrowers are finding to refinance — lower interest rates, higher property values — are likely to land us in more problems down the road, Worrall isn’t worried.
“You can’t have gone through what we did in 2007-2010 and not fear that boogeyman,” Worrall admits.
“Certainly, we all want to see property values increase at a measured pace and anywhere that values are increasing in a manner that doesn’t seem in line with historical norms is a concern. There are certain MSAs where that argument can be made today. But we pay very close attention to hot real estate markets and one of our core competencies as a special servicer is anticipating risk and addressing that with borrowers.”
Worrall said the bigger issue for most industry players isn’t churn, but market volatility, which is making it difficult for companies to know what adjustments to make to most effectively manage their businesses.
“As the economy continues to improve, servicers will benefit, even with more runoff,” Worrall said. “The value of the servicing asset will improve. But general market volatility is a big challenge for both originators and servicers. It’s difficult to adjust your business when the 10-year [Treasury] is moving up and down 3% each day. It’s hard to move quickly enough to keep up with those macroeconomic swings on a daily basis. The hope is that the market will become less volatile, making our businesses easier to manage.”