Are You Ready to Manage a Subservicer?

For lenders seeking to use a subservicer for the first time, finding the needed experience is a major challenge.

Many companies are in the process of obtaining agency direct approvals. This is prompted by good lenders finally reaching the breaking point with the same problems that have plagued correspondent relationships for years: dragged out, inconsistent funding process, balancing credit overlays from multiple investors and varying compliance positions. The move to agency direct sales can provide significant value to the organization in efficiency, the bottom line, and the balance sheet. It all sounds perfect as long as a lot of attention is given to ramping up the policies, procedures, and operations staff to handle the servicing functions. pickingworker_fmt

What is required?

For most lenders the general requirements of direct lending to a GSE are relatively easily met. The requirements that it be: licensed, possess a fidelity bond and an errors and omissions policy, and a minimum net worth of at least $2.5 million is the first bar lenders reach. Of course the business has to have shown the capacity to originate, sell, and/or service the mortgages they are seeing to sell. The challenge for many originating lenders is finding the servicing experience when you have never serviced a loan (at least intentionally). A few clients are very surprised at the idea that you have to build the servicing structure before you have the loans. The reality is you need a horse and a cart before you can be in the delivery business.

Not surprisingly, the GSEs find many gaps in the lender’s written procedures for monitoring the sub-servicer. The lender is still required to have policies and procedures to monitor all servicing functions, especially investor reporting and default management. This process puts the vendor management policies and procedures to test and can slow the application process.

For an originating lender adding servicing in the GSE approval process, the lack of servicing experience is a significant hurdle.

Adding operations staff is not on most mortgage industry business plans today, which leads many companies to consider using a sub-servicer. The sub servicing option still requires expertise and staff at the mortgage company. Two recent clients submitting for agency approval ran into the road block of not enough servicing experience on hand. Another client who took the leap to hire the servicing manager without one loan on the books will be getting their approval, with enhancements needed, very soon.

The operative word is experience

Experience is key but what exactly do you need, where do you find it, and how do you get it if you can’t find it? You can build it or you can buy it. The latter is normally quicker but requires careful cost benefit analysis by someone very qualified (sounds like a good topic for another article.). The use of a sub-servicer quickly becomes necessary for those who need the insurance of an existing servicing process right from the start. But the originator cannot merely hire a sub-servicer and forget about it. Remember the horse and cart analogy. Think of a sub-servicer as the workers who load a flatbed cart and you are the horse driving the cart. You must also build and maintain the rails around the cart that keep the shipment secure.

For companies interested in leveraging a sub-servicer, you must hire someone to manage the sub-servicer. Eventually the volume of loans may dictate that you have a small support team. It’s tough to find someone with complete knowledge of servicing and default loans from A-Z.

The job may be much more than a general oversight function. If you need to be selective, the place to start is to find someone experienced in non-performing loans. This is important because the collections, notifications, customer service, loan modification, loss mitigation, bankruptcy, foreclosure, property preservation, and similar issues are where the dollars stack up and where the sub-servicer can impact your reputation with the agencies. For example, an error by the sub-servicer on a group of FHA loans can impact your compare ratio and cause a measurable ripple effect through underwriting, audit, and even warehouse lines.

As a result, not all servicing experience is created equal. The oversight of the sub-servicer requires someone who understands what is supposed to happen and can detect, through reports, when a process is not meeting agency or company standards. Some of the sub-servicers will provide training about their systems to understand the reports but we recommend that the company’s servicing manager take a full onsite tour of the sub-servicer’s operation. This is the best way to gain the visual education needed and will help when problems come up later (and expect that they will, just because it’s the mortgage business).

The process of a site visit

This first site visit is an education process, not an audit. It will be important to develop relationships and process. Ask every question that comes to mind. Think of the worst case scenario borrower and find out how they will handle it. Identify when you may want to get involved with or take over borrower communication.

Keep in mind the document custodian relationship still falls with the lender. Everything else is negotiated with the sub-servicer. If the company is completely new to servicing, it is best to have as much as possible handled by the sub-servicer and start training. Begin by fully understanding basic servicing of performing loans, including escrow account management and insurances. Getting a complete understanding of these areas is the first critical step since the expectation should be that loans won’t start going delinquent for at least a year!

Understanding the basics will also help in the event a customer calls the company, and not the sub-servicer, first. For example, it helps if a company team member is prepared to answer some basic service questions such as:
  • Payments adjusting due to escrow analysis
  • Payments being forwarded when the wrong address is used
  • How to get and how long does it take to get a payoff quote
  • How are monthly statements delivered?
  • How long does it take to get a satisfaction/discharge after pay off
  • Addresses for payments versus escrow funds or delinquent payments
  • What to do if the customer says they can’t make their payment
  • What to do if the borrower is upset by collection calls from the sub-servicer
  • What is the loss mitigation process

In addition to immediate basic procedures, the lender will need to determine how the annual audits will be conducted.

Site audits of a sub-servicer should be conducted at least annually. The audit should be able to assess:
  • Compliance with investor, agency and regulatory guidelines
  • Assess whether the operating areas are utilizing industry accepted best practice and prudent servicing standards
  • Assess the organizational structure, staffing levels and general staff expertise relative to current and future operating requirements
  • Determine whether each of the functional areas of loan servicing has adequate policies, procedures, and operating methods in place
  • Evaluate the capabilities of the servicing systems and side systems used to perform loan servicing
  • Determine the adequacy and type of management reporting

Generally it takes a team of two to four people to collect the skill sets required for completing an onsite audit of servicing, including investor accounting and non-performing loans. Everything must be reviewed. Do not make any assumptions. Treat the sub-servicer as your employees who need managing and monitoring.

The sub-servicer report card

A few of our clients have developed a sub-servicer report card used internally to track deficiency problems on a monthly basis. By communicating the report card results each month with the sub-servicer, both companies are able to make improvements in customer service and monitoring procedures. The first report cards will have only a few loans, but as your pipeline grows the data will be very valuable to track the sub servicer’s grade well before the servicing audit results come in and to assist in identifying the root cause of various problems.

No substitute for training

Even with a sub-servicer, lenders must have a servicing training plan to stay on top of their game. Without training, agency requirements are missed and the sub-servicer isn’t monitored as closely as needed. Servicing education is a mix of hands-on practices, monitoring of changes in regulations, attending industry events and having annual education and certification programs. Just as on the origination side, nothing stays the same. Borrowers constantly come up with new stories as to why they can’t make a payment, property management and preservation changes with economic conditions. Technology is improving our ability to automate many steps in the process, too. It is not redundant to have servicing staff in house and use a sub-servicer. The in-house team not only guards the company reputation with the agencies, they ensure borrowers are treated fairly and with a high degree of service to keep a customer for life.

Making it work

Agency direct approvals are a key profitability route for many mortgage originators but it is not without its challenges. Having experienced staff is the key to the process and that requires adequate in-house oversight expertise and a well-developed sub-servicer oversight process. Compiling the right staff and training them to stay up-to-date can provide direct help improving the bottom line.