To stay agile in a changing market, companies adopt subservicing strategies

Sammy J. Long, director of business development, GMAC Mortgage Corp.

As published in Scotsman Guide's Residential Edition, September 2006.

Most mortgage originators, servicers, banks and investors would readily describe themselves as being "agile." In today's competitive mortgage market, agility means making quick decisions and moving rapidly from idea to implementation in response to ever-changing market conditions.

Agile mortgage-industry players not only adapt to changing near-term conditions, but they also think strategically before making any structural changes. This helps to ensure the success of their organization as a whole.

While many mortgage players claim general agility, they may be oblivious to the number of specific industry segments that require it. These segments include origination, post-closing, servicing and secondary markets.

Although servicing is referred to as the next booming sector in the mortgage industry, outsourcing the actual servicing -- known as subservicing -- has become a key strategy for many mortgage firms trying to stay agile in a tight rate environment.

Subservicing basics

To put it simply, subservicing is employing an organization to service loans on behalf of the owner of the mortgage-servicing rights. Subservicers handle everything servicing requires, from customer-service phone calls and default-related activities to payment processing and investor remittances.

Engaging a subservicer can be an attractive business strategy for originators, servicers and investors. According to a mortgage publication's quarterly data report, subservicing volume for the top five providers has shown a 19-percent increase from first quarter 2005 to first quarter 2006.

Virtually any mortgage product can be subserviced with the right servicer. A subservicer can take first mortgages, closed-end second mortgages, home-equity lines of credit and unsecured consumer credit. A few subservicers can handle payment-option ARM loans, graduated-payment mortgages and interest-only loans. In addition to various product types, multiple asset grades can also be subserviced, from prime to scratch-and-dent to distressed loans.

Regardless of product, subservicers offer various service options. For example, originators can contract for long-term servicing when they originate loans and can retain the whole loan or mortgage servicing rights indefinitely to take advantage of a portfolio's cash flow. Another option is interim servicing, which occurs when loans are held for sale for a short time and then transferred to the organization that purchased them.

For long-term subservicing, a top-tier subservicer can support servicing loans under any delivery structure, be it agencies, private investors or securities.

Using a subservicer can also provide assurances that loans are being serviced to investors' standards and if desired, to even stricter standards of the originator and service-level agreements. Most subservicers generally offer selectable service levels while requiring set client approvals, which helps mitigate concerns about controls.

An added feature of subservicing is private-label branding. Most subservicers offer a private-label-branded solution, which keeps an originator's name on customer correspondence, Web sites and customer interaction. This helps an originator maintain brand awareness, and it potentially increases retention.

Co-branding and subservicer branding are other options. Co-branding features the originator's and the subservicer's name, while subservicer branding includes only the subservicer's name.

Cost benefits

Subservicing helps reduce and possibly eliminate the high -- and often unrecognized -- cost that most mortgage firms pay to service products. This essentially allows the owner of the servicing to trade fixed overhead costs for lower variable costs.

By subservicing, an originator can pay for the loan-servicing functions on a per-loan basis. This helps avoid hiring based on business-cycle fluctuations, including those such as increasing-rate conditions, which can change volume. The decision to align with a subservicer may seem especially beneficial as mortgage rates climb and as values attributed to servicing rights gain ground in market value whether they are traded, sold or retained.

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