It is done! The residential mortgage loan is successfully launched. And the credit union is now considering portfolioing or perhaps selling on the secondary market, the released service, or the retained service.
With the paid-up service option, a credit union receives an “all-in” payment, both for the loan and the mortgage management rights (MSR).
If the loan is sold with a service reserve, a government sponsored company (GSE) pays the credit union at least 0.25bp per loan (other investors may differ) to perform all service functions.
Now the credit union must navigate the arduous task of fulfilling all of the service responsibilities during the life of the loan.
Or, the credit union could gain huge benefits from outsourcing these tasks.
More than collecting the monthly payment
A comprehensive mortgage management division is responsible for basic administrative, compliance and tax functions, including:
- Loan management. Customer service / call center, website, escrow, payment / refund, and more.
- Default administration. Collections, loss mitigation, foreclosures, Electronic Default Reports (EDRs), and more.
- Business Administration. Quality control and quality assurance.
- Compliance. Federal, state, local and investor regulations.
- More, client relations, remittances / investor reporting, risk mitigation, etc.
Why choose enslavement?
The advantages of outsourcing are numerous (see box). Ensuring regulatory compliance in itself is worth the move to outsourcing.
Often, misconceptions cloud the decision: “Too expensive … We know our borrowers better … The board will not approve … We will lose control.” “
These are all questionable assumptions.
What does a subcontractor do?
A subcontractor is a qualified outsourcing partner who performs all administrative, compliance and financial service activities related to a mortgage loan for a fixed monthly fee per loan. This includes all of the basic functions mentioned above, as well as standard and custom month-end reports; reconciliation and delivery to mortgage holders and investors; private labeling capabilities; and more.
The difference in cost
Managing all costs and risks associated with maintenance is essential. Unfortunately, the cost of service (CTS) calculation is rarely done and least understood.
To compare the costs of servicing mortgages in-house versus outsourcing, credit unions should consider:
- “Cost of service per loan”. The internal cost per loan / per year, calculated by dividing the total costs by the number of loans managed.
- “Opportunity per loan”. Which is most likely paid to outsource the service, per loan, per year.
- “Estimated savings”. Amount saved by hiring a subcontractor.
- “Economies of scale.” The loan savings sub-contractor realizes the sheer volume of loans he manages.
A subcontractor has a much lower STC per loan due to economies of scale. The only way a credit union can match this cost is to serve such a large volume. Additionally, the sole purpose of a subcontractor is to manage the intricacies and complexities of mortgage lending. Mixing asset types, as credit unions do, creates far more problems with service than with efficiency.
In our white paper, we compare seven scenarios for handling different levels of mortgages internally. The estimated savings through outsourcing are spectacular and compelling. Download the white paper on Outsourcing.
Owning the rights to manage a residential mortgage loan should provide the credit union with a solid return on its investment. The right qualified service partner can help credit unions maximize the value of their MSR while improving service to borrowers.
PIERRE T. SORCE, CMB, is President and Chief Executive Officer of Midwestern Loan Services.