The Silent Unknown …

Much of the content I have written about prior to now has been Capital Markets and Operationally focused.   After all, this is the typical area of focus that is given by C-Level executives.   The immediate income stream is derived from loan production volume, income associated with origination fees and other fees -vs- overhead expense and the effectiveness of a Capital Markets team in the pricing, hedging, sale or securitization of loans. This part of the loan life cycle earns immediate and ongoing attention to then meet an organization’s budget and income expectations.

Another part of the income stream is if the organization decides to sell or retain the loan servicing rights.  If it opts to sell the MSR, a multitude of execution strategies exist.  Variations are significant in pricing models, financial impact, timing of income and contractual risk.  The second prong of the loan servicing decision is when and if the strategy is to retain the MSR.   So, I beg the question – At the C-Level are you paying attention to the “Silent Unknown” – the Loan Servicing component and requirements for your business? If the honest answer is “NO”, then take time to read this blog to understand the “WHY” Loan Servicing merits ongoing, detailed attention.  

Loan Servicing is not just the process of collecting and posting payments, escrow analysis and hazard insurance claims.  The scope of servicing operations includes the ability of a seasoned team to manage, under published requirements of the GSE’s, FHA, VA, RD and Ginnie Mae on “how to manage the asset.”

And, in the case of Housing and Finance Agencies, the role shifts into understanding how the Master Servicer’s activities impact the loans performance.   While the HFA has sold the MSR, it still has obligations under Mortgage Revenue Bonds and required cash flows to the bond holders.   The performance of loans, and the Master Servicer’s ability to demonstrate compliance with Fannie Mae, Freddie Mac, FHA, VA, RD and Ginnie Mae requirements can impact current and future bond ratings, thus current and future pricing under the MRB model.

Even experienced Loan Servicing teams can fail in keeping abreast of the multitude of requirements that are specific and different based upon the type of loan, sale structure, i.e., whole loan -vs- MBS, remittance type, investor reporting, collections, and default / loss mitigation requirements.  This is where the C-Level leadership comes into play.   It’s an adjustment to understanding how the requirements are specific, detailed and have impact on an organization’s regulatory and investor risk.   Additionally, ongoing education, ownership for and development of Corporate Governance, reporting, and monitoring of the Loan Servicing Department is a given – though in many instances hasn’t been thought of and developed.

Another component is when an organization utilizes a Sub-Servicer. In the role as an approved Fannie Mae, Freddie Mac Seller/Servicer the GSE’s expect a group of individuals with tenured loan servicing experience to manage, develop, administer, monitor and report on the performance of the Sub-Servicer.   It is this requirement that can be confusing as its natural for a lender to believe the Sub-Servicer is on their “A Game” after all they are the experts.  Yes, while this belief is common and easy to adopt to, it does not remove the Seller/Servicer from the development of Sub-Servicer Oversight. 

This is where the “Silent Unknown” may exist in your organization.   Think of the servicing asset as a long-term cash income generator.   If the Loan Servicing Department (and Sub-Servicer) does their job effectively, and efficiently meeting all regulatory requirements, and those of the GSE’s and Ginnie Mae, and the MSR asset performs well then consistent income is earned over time.   If your firm doesn’t have a formal structure for a Loan Servicing Department that can demonstrate effective controls and reporting, has a trained staff, doesn’t have policies and procedures then this needs to be addressed immediately.  In this scenario, your organization is already out of compliance with required contractual responsibilities of your secondary market partners. 

You now can understand why the Loan Servicing Department can be a “Silent Unknown”, even when the firm’s business model has always been to retain servicing.  If things appear to be working ok, then why dive further into the Loan Servicing Department?   The answer is simple, it is a long-term income stream and with it comes regulatory, GSE, insurer, guarantor and investor requirements that are specific.

If your firm needs guidance in this area reach out to the team at BlackFin for an assessment of the current state and future state for your Loan Servicing Department.  You won’t be disappointed to learn more about our Scope of Services.

For more information on how BlackFin to be of assistance to your HFA, contact BlackFin Group at info@blackfin-group.com

Luana Slettedahl is a Principal Consultant with BlackFin Group in the Mortgage Strategy Practice. Luana brings forty years of diversified experience in Capital Markets, Mortgage Servicing Rights, GSE and Ginnie Mae relationship management and Seller / Servicer requirements. In conjunction with her understanding how to successfully do business with the GSE’s and Ginnie Mae, has made her a significant asset to her clients. For more information contact info@blackfin-group.com