Why Servicing and Origination Are Converging Again

Every cycle in the mortgage industry creates a need for servicers to readjust their strategies.

When distressed mortgages dominated and production fell, modifications proliferated. So some servicers recruited adaptable origination professionals to help with mods, since the work required a similar skill set. Then, as problem loans receded, servicers shifted to tasks supporting the origination of loans and retention of good customers.

That trend is intensifying with a new servicing rule on the way that could add to costs, online payment options starting to influence consumer choices and interest rates remaining low. So the two sides of the business are getting closer again, in a new way.

"If aggregators of servicing are not in the origination business then absolutely they should be considering that," said David Lykken, president and founder of consultancy Transformational Mortgage Solutions in Austin, Texas.

The efforts of some servicers that have added origination already have been evolving. Jay Bray, Nationstar Mortgage Holdings' president and CEO, said in the company's last earnings call that it plans to consolidate origination and servicing under a new single brand called Mr. Cooper this summer.

"Our goal is to create an entire company and a brand that embodies the spirit of customer advocacy," he said.

While servicers need to at least consider going into origination in this environment, it's not a strategy that works for everyone.

There are varying business models and room remains for some servicing specialists to handle tasks others may want to outsource. Also, companies have to be careful not to overextend themselves, said Lykken.

Servicers considering an origination venture should not "venture out beyond their strengths," he said.

Retention efforts are the natural starting point for servicers moving into origination, said Terry Moore, senior managing director at Accenture Credit Services.

"Servicing is getting more and more expensive with regulatory costs and there’s been a good bit of decline in portfolio size at a number of servicers, so one place they are looking is at more aggressive retention strategies," he said.

Given the high credit quality of current borrowers and their ability to refinance, retention has become more of a focus for mortgage servicing rights owners in particular, according to Kevin Brungardt, CEO of RoundPoint Mortgage Servicing in Charlotte, N.C.

"If you are a big servicer that actually owns an MSR position today, then you are going to want to have retention," he said.

But while more servicers may be moving into origination via retention than before, it's still more common for originators to move into servicing, Brungardt said.

"It's unusual that we started with the servicing platform first," he said.

RoundPoint is only referring loans that it holds the servicing on to its retention unit, Brungardt emphasized.

"We're not going to compete with our customers," he added, referring to companies that hold the rights to separate servicing portfolios subserviced by RoundPoint.

Companies historically have had mixed results with retention but an in-house platform can help, said Steve Kropper, a venture capital and private equity advisor.

"Where it was well done, it was intracompany," Kropper said. "The borrower would call into servicing and they would inquire about payoff information. Then, depending on the circumstances, the servicer would say, 'If you would stay, I think there would be some financial advantages.'"

So will originators now return the favor from a few years ago and start recruiting people from the servicing side of the industry?

The general consensus in the industry is that cross-training servicers and originators in each other's skills as the business cycle shifts can work, but not in all circumstances.

"Can someone shift their relationship skills in origination to loan servicing and vice versa? The answer is, 'yes,' but many can't," said Lykken.

There are different regulations to be aware of on the two sides of the business, and originators must be licensed. If those challenges are surmountable, the key thing to look at is whether the person has customer skills, he said.

Leading mortgage lender and bank Wells Fargo indicated it has a similar philosophy.

"Whatever part of Wells Fargo they work in, we want our team members to focus on doing what’s right for the customer. That is certainly true in both mortgage servicing and production roles," said Stacie Bendixen, a consumer lending communications consultant at Wells.

Banks' servicing departments are starting to have more influence over mortgage customers' shopping decisions, said Tim Neer, senior vice president and servicing oversight director at Colonial Savings in Fort Worth, Texas.

He said he has seen a borrower switch from one lender to another because the first one didn't make available the online payment technology the customer wanted to use.

"Millennials may want to pick their servicer in the future," Neer said.