Mortgage Banking, without Fumbles
Jones, Alton M., ABA Banking Journal
Rights to service billions of dollars of mortgages change hands each year. While the reasons for purchases vary, the most common ones include improvements to cash flow or profitability; accounting concerns; and the urge to improve the efficiency of the entire servicing portfolio by bulking up.
These servicing transfers can produce the intended results - or significant and costly difficulties. The key to success is planning well in advance of the transfer date; in fact, the effort should begin when the decision is made to pursue this means of portfolio enhancement. Bulk purchase basics. Most banks and mortgage banking firms use three methods to build portfolios. The basic is retail production, followed by wholesale purchases from correspondents. The third method is bulk acquisition of servicing rights or loans held by others.
The first two methods produce whole loans with the accompanying overhead. The institution also faces risks in selling the loans into the secondary market. On the other hand, bulk acquisitions of servicing present neither of these risks, and the strategy may be started or stopped easily and quickly.
Yet this relative ease frequently creates problems. For example, at many financial institutions, the servicing manager is not consulted before the acquisition.
Stories frequently circulate of CEOs or other officers who call the servicing manager with the news that $1 billion of, say, Federal National Mortgage Association, servicing has been purchased and will arrive in two weeks.
The fact that the servicing department may not be adequately staffed to handle the acquisition in that time frame was not considered. Nor was it considered that the company is not a Farmie Mae-approved servicer and, if it were, that 45 days' lead time would be required. Ideally, the servicing manager should be a member of the acquisition committee and an integral part of the decision and planning process.
Scoping things out. Most successful firms consider prior review of a specific portfolio the most crucial period. What are the characteristics of the portfolio? Is it too large to absorb comfortably?
Can adequate service be provided to new customers without neglecting the existing portfolio? Remember that years of customer-related problems led to the inclusion of transfer provisions in the Cranston-Gonzalez National Affordable Housing Act of 1990. (ABA BJ, Feb., p. 28.)
Is the timing appropriate? Year-end is a busy period for all firms and may be a poor point to make an acquisition. There are other bad times to make a big purchase, among them, tax season, when summer vacations have already been scheduled, and when massive escrow analysis has just been done. (When an institution performs a portfolio-wide analysis and notifies borrowers of necessary changes, switchboards light up and everyone gets very busy.)
There are other potential problems to consider: What types of loans are included in the portfolio? Are they compatible with the existing portfolio? How old are the loans?
Location is another consideration. Say the loans are in states other than those in which you currently operate. It may be necessary to seek legal opinions as to specific state requirements and possible licensing requirements. Each of these items takes time to resolve.
Data processing requirements demand scrutiny. Almost every portfolio offering states that a "tape-to-tape" conversion is possible. "Possible" means many things. Virtually all servicing software systems can provide a direct input to the purchaser's system, but the costs of producing it may not make this approach feasible.
This is particularly true in the acquisition of a small portfolio. A 5,000-loan portfolio can usually be loaded from one system to another for only a bit more than a 1,000-loan portfolio. For the reasons of compatibility, cost, and lead time, you should always include your systems people in the initial portfolio considerations. …