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ExplainingServicing to a Client

Borrowing money is exactly that: borrowing. The person borrowing the money agrees to pay it back based on the terms of the loan, and usually, with a home loan, monthly payments are agreed upon. Orion’s brokers know that those monthly payments go to a company called the “servicer” and can be the company that originated the loan, or the company to whom the rights to service the loan was transferred after the loan closed. We mention this because every lender and servicer talks about marketing, borrower retention, refinancing, mortgage servicing rights(MSR) valuation, and managing the servicing asset. How did it come to this, and why is servicing coveted by lenders, large and small alike?

With theinvention and development of the mortgage-backed security (MBS) system, assetslike mortgages could be bought and sold, even if a particular loan was not in asecurity backed by mortgages. These loans have two sources of value:

1.     The actual rate of interest that aborrower pays (most of which is passed on to the investor/owner of the loan orpool of loans: think of owning a Treasury security), like any other bond.

2.     The value of the servicing income, whichis not like every other bond.

Brokers know that the mortgage servicer handles, as you can guess, the “servicing.” The brokers typically explain to their clients that the basic servicer responsibilities include collecting and processing the monthly payments, sending out statements, handling escrow accounts, and providing customer support. More often than not, the brokers have to explain this because a mortgage servicer is often different from the lender. Put another way, the institution like Orion that approved a borrower’s application, processed the loan, and loaned the person the funds to buy or refinance their property is often not the one to service the loan in the future.

A servicer is needed to ensure that all the correct parties are paid on time and that any issues with the borrower or the loan are handled properly. It’s likely the mortgage note will have already been sold on the secondary mortgage market to a government-backed home mortgage company, such as Fannie Mae or Freddie Mac, or to a pension fund, an insurance company, or a money manager. Or, in the case of a bank or credit union, the loan may be put into its portfolio of other assets and serviced by the bank or credit union. But, in general, independent mortgage banks, and often banks and credit unions, bundle similar mortgage types and sell them as investments.

Mortgage servicers don’t work for free, and this is the basis of the value of servicing. It is a numbers game. Basically, if the servicer is being paid $100 per month to service a given loan, and it costs them $30 in labor and other overhead, they make $70 per loan per month. If the servicer can drive down the cost, either through efficiency or servicing more loans or lowering their overhead so that it costs them $20 per month to service the loan, then they make $80 per loan per month. It’s as simple as that.

Often, whatever company “owns” the servicing arguably has the inside track as to if and when the borrower refinances the loan. On top of that, companies have opportunities to connect with customers in general. So yes, it is a revenue source, but far-sighted owners of the MSRs try to fully utilize these opportunities and foresee the advantages or disadvantages of owning certain types of servicing. Owners of the mortgage servicing rights need to provide value to customers, something that seems to become more important every year. But we believe that the broker who originated the loan can win!

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