As rates go up, mortgage servicing needs to gear up – but we have seen that the cost of mortgage servicing is also showing a rising trend. That is a problem, but we also see some servicers who are using simple focused ways to address this.
Since 2019, the cost to service ($ per loan) has increased by over 9% - going from $220 per loan in 2019, to $240 per loan in 2021. Although REO and other costs decreased during this time, direct servicing costs went up by $36 - the main contributor to the overall increase. Corporate and administrative costs contribute $48 to this $240 – that is, 20% of the costs are administrative. In addition, during the same time, productivity dropped. The average loans serviced per employee dropped to 723 per employee from around 900 per employee.
This is happening in an environment of rising interest rates. That is putting pressure on servicers as they need to increase customer engagement and solutions to manage any delinquencies, while trying to reduce costs. The regulatory and compliance environment remains challenging as well, contributing to increased expenses.
The economic environment is volatile with changing interest rates, and servicers need to react quickly. So, what should they do? What is the specific problem or problems they should focus on?
We work with several servicers, and we are seeing servicers go through a range of options handle the situation – including layoffs, efforts at automating some processes, and in some cases even looking at either sub-servicers or going the opposite way and trying to bring servicing back in-house.
The problem is – not all solutions will work for all servicers. So, the better starting point is to understand what the specific need may be.
Here are some areas that servicers should look at:
Find ways to reduce the cost per loan serviced: since direct costs have increased, this is an obvious area to target
Increase average loans worked per team member: this requires bringing in more efficiency into business operation
Work on corporate and administrative costs: Corporate and administrative costs are a large contributor to the total cost of servicing each loan (nearly 20%), so any reduction in non-producing support staff would help.
For over two decades, we have worked with several servicers and have proposed methods to address these needs. We will talk about them in the following section.
Every servicer feels their situation is unique and more complex. More importantly, they feel that there are no simple solutions available that will alleviate the pressures quickly, and permanently. But that is not true. In fact, the typical ways to address these issues (layoffs, full-scale automation, centralization) sometimes turn out to be quick fixes which don’t withstand the test of time and changing economic and interest rate environments.
On the other hand, our experienced team of mortgage experts have used some innovative but simple-to-implement methods to bring about quick but flexible solutions.
Intelligent Staffing: This methodology involves a quick but thorough process efficiency review that aims to implement intelligent work distribution – for instance, farming out lower-skilled processes and work to lower cost locations, including global locations, while retaining critical, high-skilled work onshore and/ or in-house. This directly helps reduce staffing costs and increases employee (and customer) satisfaction.
Examples of work that should remain in-house or onshore include decision-making tasks like underwriting and loan modifications; while offshore/ outsourced team members may work at performing basic calculations, ordering & tracking documents, reviewing and indexing documents, file set-up, escrow line set-up, lien release & payoffs, and similar tasks.
Implementation of intelligent staffing allows servicers to gain staffing flexibility and to expand or contract their servicing capacity easily. The overall cost per team member decreases quickly, while allowing the teams to reengineer processes.
Intelligent staffing is typically combined with our proprietary methodology called SmartTrans®. This 5-step consultative process is unlike ‘traditional outsourcing’ and its goals are to implement first a quick and efficient improvement of costs without disruption, and then offer a longer-term process improvement framework.
Seamless automation: Another important aspect of servicing is compliance and quality control. But typically any quality control activities add cost to operations. However it is possible to automate in a smart way to reduce costs upfront, and increase efficiency of QC and compliance over time.
One solution we deploy that consistently works to reduce costs is a platform-enabled automated QC and compliance solution that is powered by Copasys®. This is a rules-based Quality Control platform that delivers consistent results by eliminating human errors and reducing the number of cures required. This in turn reduces customer-related challenges, commonly faced by servicers.
These ready-built tests are created for servicing areas like Reg X checks, onboarding, SCRA, Dispute Resolution and for general compliance functions like SOX, RCSA and operational risk reviews.
Discovering errors before they become a problem can bring great efficiency into servicing operations, as fewer cures are required. This implementation reduces staffing needs for in-line QC, as well as ‘QC of QC functions’. With this increase in accuracy, there is a reduction in any penalties and external checks and audits, reducing costs further.
Ready-built solutions plus OCRtechnology integration: Incorporating Intelligent Document Processing solutions into the mix makes it even easier to reduce human intervention for a lot of the tasks. As expected, this increases the average loans worked per team member, and decreases the ratio of non-producing staff.
One simple example of this technology - documents are ingested and “read”, the document data is compared to imported data and validated against the rules already set-up in the rules-engine. The reporting delivered includes Pass, Fail scenarios, Fail Reason, etc. eliminating the need for manual QC and compliance checks for multiple functions. This significantly increases the accuracy (and the efficiency) of servicing functions.
Some available, ready-built solutions include rule-sets for CFPB, the GSEs – FNMA, FHA, VA, etc, State Specific Regulations and FEMA. The system can also be configured for customized/ company-specific QC, Investor-specific guidelines and can cover almost all servicing including Servicing Ownership Transfer, on-boarding, escrow management, lien release, modifications, etc.
Servicing costs are rising even as the need for customer engagement is increasing. There are some innovative solutions to address the servicing issues and to increase the loans serviced per team member and reduce cost per loan serviced. These solutions allow lenders and servicers to maximize their resources using seamless automation and intelligent staffing to reduce cost per loan and gain true efficiencies while becoming more compliant.