Five Reasons Behind Mortgage Subservicing’s Continued Popularity

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mortgage-6-3-19.pngMortgage subservicing has made significant in-roads among banks, as more institutions decide to outsource the function to strategic partners.

In 1990, virtually no financial institution outsourced their residential mortgage servicing.

By the end of 2018, the Federal Reserve said that $2.47 trillion of the $10.337 trillion, or 24%, of mortgage loans and mortgage servicing rights were subserviced. Less than three decades have passed, but the work required to service a mortgage effectively has completely changed. Five trends have been at work pushing an increasing number of banks to shift to a strategic partner for mortgage subservicing.

  1. Gain strategic flexibility. Servicing operations carry high fixed costs that are cannot adapt quickly when market conditions change. Partnering with a subservicer allows lenders to scale their mortgage portfolio, expand their geographies, add product types and sell to multiple investors as needed. A partnership gives bank management teams the ability to react faster to changing conditions and manage their operations more strategically.
  2. Prioritizes strong compliance. The increasing complexity of the regulatory environment puts tremendous strain on management and servicing teams. This can mean that mortgage businesses are sometimes unable to make strategic adjustments because the bank lacks the regulatory expertise needed. But subservicers can leverage their scale to hire the necessary talent to ensure compliance with all federal, state, municipal and government sponsored entity and agency requirements.
  3. Increased efficiency, yielding better results with better data. Mortgage servicing is a data-intensive endeavor, with information often residing in outdated and siloed systems. Mortgage subservicers can provide a bank management team with all the information they would need to operate their business as effectively and efficiently as possible.
  4. Give borrowers the experience they want. Today’s borrowers expect their mortgage lender to offer comparable experiences across digital channels like mobile, web, virtual and video. But it often does not make sense for banks to build these mortgage-specific technologies themselves, given high costs, a lack of expertise and gaps in standard core banking platforms for specific mortgage functions. Partnering with a mortgage subservicer allows banks to offer modern and relevant digital servicing applications.
  5. Reduced cost. Calculating the cost to service a loan can be a challenging undertaking for a bank due to multiple business units sharing services, misallocated overhead charges and hybrid roles in many servicing operations. These costs can be difficult to calculate, and the expense varies widely based on the type of loans, size of portfolio and the credit quality. A subservicer can help solidify a predictable expense for a bank that is generally more cost efficient compared to operating a full mortgage servicing unit.

The broader economic trends underpinning the growing popularity of mortgage subservicing look to be strengthening, which will only accelerate this trend. Once an operational cost save, mortgage subservicing has transformed into a strategic choice for many banks.

The Secret To Mortgage Lending To First-Time Buyers

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mortgage-2-11-19.pngMarket volatility and interest rate hikes have created uncertainty for the entire mortgage industry. Lending portfolio growth has also met pressure from the tight housing supply and the influence of fintech on the mortgage process.
One bright spot in the coming years will undoubtedly be the first-time homebuyer market, but banks must adapt traditional lending practices to capitalize and compete successfully.

First-time home purchasers are now 33 percent of potential buyers. Some surveys have indicated millennials–the largest future housing buyer population–are starting to embrace home ownership. Crafting effective loan options for this demographic can provide opportunity for mortgage and home equity portfolio growth, achieve consumers’ home ownership goals and deliver beneficial partnerships between banks and borrowers for years.

Banks must address the following concerns with the first-time buyer:

  • Affordability: They are more likely to seek popular urban and so-called “surban” (new or redeveloped areas with an urban feel) environments to live. Today’s first-time buyers are enticed by alternative housing choices that typically have higher-priced entry points. Traditional builders have not focused on this sector due to profitability pressures from increased labor and materials costs, leading to a limited supply of entry-level housing. Rising interest rates further stress affordability factors for the first-time buyer and limit the options available for mortgage funding. 
  • Debt and Lack of Savings: More than 50 percent of millennials carry a rising amount of debt, with the average 2016 graduate holding more than $37,000 in student loans compared to $18,000 for the average 2003 graduate, according to Forbes. The pressure of this debt load means would-be buyers have little or no savings available for the traditional 20 percent down payment. Rate increases, especially on adjustable student loans, can exacerbate this issue for the first-time buyer though Redfin predicts a competitive labor market should bring higher wages in 2019.
  • Income and Alternative Purchase Structures: The rise of the “gig economy” has led to a high number of independent contractors in this cohort, according to Forbes. Emerging first-time buyers have also shown interest in purchasing homes to create opportunities for rental income and nontraditional co-borrowers.

Lenders can differentiate their approval process from competitors by empowering loan underwriters with structures and guidelines that address the unique challenges of the first-time borrower. Revising mortgage guidelines and devising strategies for affordable home ownership will create valuable long-term relationships with first-time homebuyers. Just a few approaches to consider are:

  • Rethinking Loan Parameters: Mixed-use properties and home-improvement loans are typically excluded from the primary mortgage process. Banks incorporating alternative building structure options and creating allowances for home renovations in the initial mortgage parameters can substantially increase the pool of homes available to buyers. 
  • Differentiating Loan Structures: Traditional mortgages may be out of reach for many first-time buyers and may not address alternative housing solutions. While options with a higher loan-to-value ratio exist, most require mortgage insurance and are subject to increased scrutiny. Pairing conforming first mortgages with home equity loans and lines offer affordable loan structures at higher loan-to-value ratios and create long-term relationships. With proper planning, including the possible use of portfolio protection products, these structures can be offered without adding risk to the bank’s loan portfolio. 
  • Diversifying Income and Debt Guidelines: Considering tenant income and/or co-borrowers may be the only option for a potential buyer to enter the housing market. In addition, banks may also need to expand guidelines to allow for alternate sources of income, such as independent contracting income, in the underwriting decision process. 

Even with numerous obstacles, first-time home buyers offer opportunity in the mortgage origination market. Addressing the needs of this sector while avoiding the risks, lenders can create profitable mortgage and home equity portfolios, which may be the best way to mitigate the uncertainty of traditional lending in the future.

NFP is a leading insurance broker and consultant that provides employee benefits, property and casualty, retirement, and individual private client solutions through our licensed subsidiaries and affiliates. Our expertise is matched only by our personal commitment to each client’s goals.

How NBKC Bank Made Mortgages User Friendly with Roostify

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For consumers, getting a mortgage can be a daunting task. Securing a home loan can take weeks (or months) from application to closing, in large part because the process often still requires offline and manual tasks. That’s not an ideal scenario for consumers who want to get in their new home, or for lenders trying to deliver a top-notch customer experience.

That was the challenge facing NBKC Bank, a full-service bank headquartered in Overland Park, Kansas. In 2014, the consumer-direct bank, which generated $2.5 billion in loans last year, realized that their internet application system was becoming a liability that could hold the bank back from further growth.

NBKC allowed clients to apply for loans online in 2014, but the application’s limited functionality didn’t provide the kind of experience the bank wanted to offer its customers, and generated unnecessary extra work for the loan officers. Based on older technology, the online application’s user interface was beginning to look obsolete. Making matters worse, the technology that powered the application was no longer completely reliable. “We often heard from borrowers that they completed [the application],” recalls Dan Stevens, the bank’s vice president of mortgage strategy. “But we didn’t always receive it.”

Another pain point was that the existing application couldn’t support a full online experience. Loan officers would still need to call the consumer after the application was submitted to complete the application. Due to the bank’s unreliable application system, consumers were sometimes asked for information they had already provided online, which was frustrating for everyone involved.

To address these problems, NBKC partnered with Roostify, a San Francisco-based fintech startup that provides a mortgage loan platform that enables faster closings and a more efficient, transparent loan process. The company bills itself as helping lenders provide user-friendly online applications, and offering online document and collaboration tools to cut down on the time-consuming manual tasks that can stretch out a mortgage approval process.

NBKC chose Roostify after seeing a demo highlighting the user experience for both the borrower and loan officer. Roostify provides NBKC with a highly usable consumer-facing online application, which the bank could white-label to present consumers with a branded NBKC online experience.

Through Roostify, NBKC’s customers can now apply for a mortgage in as little as 20 minutes without the need for a phone call or manual intervention from a loan officer. More customers are completing applications, too. Stevens confirmed that the updated process was a hit with NBKC’s customers. “Expectations [for an online experience] are super high. Hearing no complaints, with an extremely high usage and completion rate, shows us that it’s well received by our borrowers.”

NBKC was also able to use Roostify’s automation features to help improve internal productivity by reducing manual processes, particularly around documentation.

“One of the biggest selling points for us in 2014 was the creation of a customized required document list,” explained Stevens. “Not every loan application requires the same documents, so for it to be able to match the borrower’s personal situation with the loan program they were wanting, and giving them this information without needing to ever talk to a loan officer, was an outstanding upgrade in our workflow.”

Eliminating repetitive manual tasks like generating document lists and going over applications by phone freed up time for NBKC’s loan officers to process more loans, contributing to an overall increase in productivity. Between 2014 and 2016, NBKC saw their average loans nearly double, from 6.5 to 12.2 loans per loan officer per month.

Banks and fintech startups alike face stiff competition in most areas of financial services, and banks like NBKC highlight the importance of offering a seamless digital customer experience. The bank’s partnership with Roostify illustrates how savvy use of technology platforms can also benefit the lender’s bottom line.

The Risk of Doing Nothing

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Video length: 43 minutes

At Bank Director’s Bank Audit & Risk Committees Conference this past June, Douglas G. Duncan, senior vice president and chief economist with Fannie Mae, discussed demographic and economic trends facing the banking industry.

Income growth is expected to improve in the future, causing positive momentum on the consumer side. How the board responds to these trends is important: a proactive or reactive decision could make a big difference.

Highlights from this video:

  • Consumer spending cycle
  • Income growth expectations
  • Interest rate trends
  • Household growth trends
  • Demographic market trends

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About the Speaker:
Doug Duncan is a senior vice president and the chief economist at Fannie Mae. He is responsible for providing all forecasts and analyses on the economy, housing and mortgage markets for Fannie Mae. Doug also oversees corporate strategy and is responsible for strategic research regarding external factors and their potential impact on the company and the housing industry.