PERSON OF THE WEEK: Paul Imura is chief marketing officer for ISGN, a provider of technology and outsourcing to mortgage servicers and lenders. MortgageOrb recently interviewed Imura to learn more about how new regulations are reshaping mortgage servicing as well as why so many midsize servicers are moving away from subservicing and bringing their servicing in-house.
Q: Since Dodd-Frank first went into effect in 2010, there has been a lot of dilution in market share among larger servicers, and yet there has been a significant increase in the midsize servicer segment. What does this mean for these midsize players?
Imura: Historically, this growing midsize servicer segment of banks and non-banks has solely focused on originations and retained servicing, the latter primarily being a customer retention strategy rather than a revenue or profitability driver. A lack of economy of scale was the main barrier to creating a viable servicing operation, as it drove up the cost per loan, so their portfolio was subserviced. Reduced capital outlay to own an attractive investment was also beneficial. Additionally, a shared services model provided these midsize servicers with easy access to sophisticated technology, expert resources, efficient processes and strong compliance standards.
The reduction among larger servicers coupled with the previously refinance-driven market has enabled midsize servicers to gain a sizable portion of servicing rights, enabling this segment to create and maintain a sustainable servicing operation. As a result, many of these players are beginning to evaluate whether to move servicing operations in-house.
Q: Why are midsize servicers considering moving away from a subservicing model?
Imura: Recent examinations conducted by state and federal regulators revealed that some of the original reasons why midsize servicers favored subservicing versus in-house servicing no longer apply. For instance, the lack of advancements in legacy technologies has resulted in platforms that follow outdated, noncompliant practices. Given that servicers have little to no control over how their loans are serviced in a subservicing model, they are forced to rely on a ‘one-size-fits-all’ solution. Additionally, the level of customer service that servicers receive is often sub-par, which results in an unsatisfactory experience for the borrower. However, it is important to note that servicing in-house is certainly not an easy task. Midsize servicers should carefully evaluate their technology and knowledge capabilities before moving away from a subservicing model.
Q: What key components should midsize servicers consider when it comes to implementing an in-house servicing model?
Imura: To drive profitability while maintaining customer, investor and regulator satisfaction, midsize servicers should focus on the following three components:
- Technology: Rather than leveraging separate technology systems that operate in silos, for servicing and default management, midsize servicers should look for platforms that incorporate both functions, allowing these systems to seamlessly interact and exchange data. Midsize servicers should consider a software as a service model, which results in low capital outlay. Technology platforms that offer robust reporting capabilities are also ideal.
- Expertise: Midsize servicers should hire an experienced team of servicing professionals that are up-to-date with the latest regulatory, investor and other applicable guidelines to ensure their policies and procedures are compliant. Providing staff with documentation surrounding regulatory requirements, desktop guides and periodic training are also instrumental to ensure loans are serviced correctly. It may be necessary to outsource some non-critical tasks to specialists to address a lack of suitable skilled resources.
- Oversight: A strong quality control program is the key to sustaining a healthy servicing operation, as it will immediately bring out any issues that need to be addressed. It also enables midsize servicers to evaluate and improve their customer service efforts, which is one of the main reasons for moving servicing in-house.
Q: What challenges should midsize players consider when they evaluate whether to service their own loans? How can they overcome these challenges?
Imura: The main challenge midsize servicers will face is balancing operational costs and control over how its loans are serviced. To maintain operational control, scalability and access to the latest technologies, servicers should consider an alternative business process as a service model. In this model, a vendor provides the technology and subject matter expertise to perform the business function on behalf of the servicer, but the servicer has complete control over how loans are serviced.
The vendor provides recommendations on how the loan should be handled, tracks regulatory and investor guidelines, maintains and updates policies and procedures, and then the servicer makes the final decision. Servicers can rely on an expert vendor to complete mundane tasks related to default management, claims management, investor reporting and investor accounting, enabling them to focus on the outliers or exceptions. Because technology is the vendor's responsibility, the servicer will also have a lower capital outlay over time and not have to worry about version upgrades.
To thrive in this new servicing market, midsized servicers can drive a competitive advantage by implementing a unified servicing model that incorporates servicing, default management and customer service functions within one platform.