5 things you need to know about servicing now

February 20, 2025 2:29 PM

Developments shaping servicing include shifts in Washington and mortgage performance, increased interest in home equity, advances in automation, and heightened tensions between costs and a strategic need for customer contact.

Those topics have generated buzz among professionals at the Mortgage Bankers Association's servicing conference and elsewhere in the industry recently as they lie at the heart of what makes or breaks strategies used in part of the business that's been a key earnings engine.

Servicing stakeholders have some thoughts on what they'd like to see changed at the Federal Housing Administration with U.S. housing officials advising that there could be policy changes and loan performance historically strong but showing some signs of weakness.

While streamlining and savings are central to some of those ideas, one size does not always fit all in a market where customer service is key. This idea is proving central to some views on what's sought in policy and whether to use strategies like subservicing.

Decisions about whether to subservice or bring operations in-house also are playing a role as one company reconsiders the composition of its technology platform.

Also, the growing home-equity investment niche has a need for servicing. While this is somewhat different than what's done in the mortgage market there has been some interest in it as the full range of products homeowners can use to tap equity take on a larger role.

Read more about what the industry has to say about all these topics.

The state of subservicing

Right now, around one out of every three loans get subserviced but within three to five years it could be closer to a 50-50 split, said Chris Sabbe, a senior vice president in enterprise sales in Onity Group's PHH Mortgage division, who spoke on a panel about the topic.

Players that handle less than 50,000 or even 100,000 loans potentially benefit from significantly lower costs from outsourcing their operational responsibility for servicing to outsourcers who can achieve stronger economies of scale because they're working with multiple customers, he said.

The other option is minimize responsibility for servicing and sell off the rights, but with the origination side of the business limited in the current rate environment that's left many with rates far below market, panelists were generally recommending keeping as much as they can afford.

"I would retain as much as possible," said Aaron Iuteri, senior vice president of customer experience at Servbank.

Subservicing can aid companies that don't have the economies of scale to afford doing that. However, for mortgage companies working in an era when recapture plays a key role in supporting scarce originations, keeping in direct contact with customers also is a consideration.

Reasons to rethink a tech stack right now

Any time is a good time to make sure technology is efficient but with the deregulatory changes in the new administration, the industry may find it has more bandwidth for innovation.

"If you're going to build a servicer with the best available technology, I'd say now's the time," said Courtney Thompson, executive vice president of servicing at CMG Financial said at the conference. CMG is bringing servicing in-house and adding new technology as it does.

The new system set for release in the second quarter utilizes CMG's pre-existing Sagent platform for core financial functions but IndustryVault provides the central data layer.

The company is utilizing Aspen Grove as a business process management tool, Salesforce for customer contact and a separate artificial intelligence-driven call center technology from Codvo.

Courtney said using these technologies adds bidirectional communication that traditional systems haven't had, improving the handling of sensitive consumer issues such as loan assumptions or successor-in-interest situations by avoiding issues such as batch processing delays.

An emerging niche for HEI servicing

There's been growth in home equity investment, which allows sharing in consumers' price appreciation, and it has created a need for outsourced servicing, according to Allen Price, a senior vice president at BSI Financial.

"There's volume, increased regulatory scrutiny and product development. Those three things will increase the need to outsource servicing," he said.

Companies like Point Digital, Unison, Unlock, Hometap and Redwood Trust's Aspire unit are originating the product and two companies, Kroll and DBRS have been rating HEI securitizations.

"I think there's going to be a lot of asset management capital behind originators and consumer demand for products other than a traditional mortgage," said Price. "Consumers are trying to find ways to monetize the value in their homes."

Appetite for HEI has varied over the years but it's had more institutional and consumer acceptance recently because several trends have aligned behind them, including a lot of built-up equity from the housing boom including some credit issues lingering from the pandemic.

It's a product that appeals to a contingent of homeowners who are "credit challenged but equity rich," he said. It also appeals to any homeowner who wants to monetize the equity in their homes without incurring debt.

HEI eligibility is linked to property value. Homeowners agree to share the equity appreciation when the house is sold or the mortgage gets refinanced. HEI terms can range from 10 to 30 years.

The servicing of a shared equity product differs from that for a mortgage or home equity product in that there isn't regular payment processing. However, HEI products require lien and delinquency monitoring for the investor or capital provider. Servicers also handle communications with homeowners such as property valuations and payoff requests.

HEI homeowner defaults are scarce but do exist. In a default scenario, first- and second-lien debt typically gets satisfied first, then equity products like HEI.

Data points to a need for a new FHA waterfall option

Since the pandemic, the Federal Housing Administration has allowed payments to be cut multiple times using partial claims up to a limit of 30% of the unpaid principal balance.

Now that the market has normalized, trade groups have welcomed an FHA rule finalized just before the election limiting borrowers to one executed home-retention option in an 18 month period starting on Feb. 2 of next year.

However, some small players could struggle with a surge in foreclosures because of this rule, so it'd be helpful if current officials could take a second look at it and add a new option to address this issue, said Donna Schmidt, managing director and owner of DLS Servicing.

Client data she has studied shows 34% of redefaulting borrowers in 2024 had a previous partial claim and the share had been escalating in previous years. A historical study done for a unique client prior to rule changes disallowing the practice showed documented budget data presented to borrowers prior to issuing loss mitigation reduced the redefault rate 75% in a 12-month period.

If smaller servicers were given the option to take such steps on a voluntary basis in some cases when a consumer redefaults within 18 months, they could improve delinquency ratios and better manage their workload, she said.

"The streamlined approach where a borrower attests to whether or not they can afford a payment definitely has a place in loss mitigation," said Schmidt. "However, not allowing the servicer to review financial data after a redefault to see if the borrower truly can afford the home or needs more assistance than the standard streamline approach, that would be a mistake."

She also urges congressional intervention to shift mortgage oversight from the Consumer Financial Protection Bureau to agencies with more industry experience like the Department of Veterans Affairs and Ginnie Mae after seeing CFPB rulemaking and conflict with those other agencies' policies.

"They needed to have more industry experience to identify rule conflicts in some situations," Schmidt, noting that she was not against oversight but would like to see more understanding of the industry's nuances from regulators.

A potential fork in the road for foreclosures

While not conclusive yet, there have been signs of a pickup in distress in the mortgage market, so there was some talk at the MBA servicing conference about whether current rules are appropriate or could cause unnecessary backlogs in a different setting.

Property preservation firms at the conference generally said they're not necessarily looking for full reversals in foreclosure restrictions but would like to see excessive rules in some jurisdictions streamlined if they cause excessive delays in getting vacant properties to market.

"We've got homes we've had for 15 years," said Craig Torrance, CEO of MCS, a diversified residential and commercial real-estate services firm.