Banks Weigh Servicing Strategies: Trading Mortgage Servicing Rights May Have Become Big Business, but It Still Elicits Strong Opinions
Cocheo, Steve, ABA Banking Journal
It wasn't too many years ago that the buying and selling of mortgage servicing rights was a relatively small business, recalls Jeff Wilson, president of Sunburst Mortgage Corp. Nowadays, says Wilson, "there are weeks where I get a call every day from mortgage servicing brokers."
What the brokers are selling is the other half of mortgage loans that are sold into the secondary market and securitized--that is, the right to collect monthly payments, remit interest and principal to the investors who bought the loans, make tax and insurance payments on the borrower's behalf, and otherwise administrate the relationship with the homebuyer.
For this the servicer pockets a fee-- but is also responsible for expenses, including collection and even foreclosure, should that be necessary.
"We don't sell servicing," says Wilson, whose two-and-a-half-year-old company, based in Jackson, Miss., is a subsidiary of Sunburst Bank, Grenada, Miss. "But we've toe-tested the market on the buy side." The $700 million (in servicing) mortgage company recently bought a package of rights on lowcoupon (low-rate) mortgages.
"We get faxes now from people we've never heard of, from all over the United States," says Wilson, during a phone interview. "As we speak, here comes yet another fax on servicing rights, from a broker."
NOT FOR EVERYONE. The buying and selling of mortgage servicing rights, once looked at askance by traditionalists in the mortgage banking field, has steadily become a staple.
Trading in rights, however, is by no means a universally accepted practice. It is driven to varying degrees by business strategies, customer service philosophies, and complicated financial reporting standards.
Participation in the servicing market by banks and bank-owned mortgage banking companies divides somewhat along the lines of size, but not consistently. Servicing brokers say banks have more typically been buyers of servicing in the recent past, though they also sell a fair amount of it.
Community banks often prefer to retain the servicing on the mortgage loans they generate because local customer connections are their stock in trade. For some, their mortgage effort is a customer service rendered for a fee, with both loan and servicing sent upstream to a bank or nonbank correspondent lender.
Other small banks prefer not to hold servicing. One western community banker, who requested he not be identified, says he specifically structured his present bank's mortgage lending program so it would sell both the loan, to avoid interest-rate risk, and servicing. He explained that past experience at another community bank during the height of the ag crisis taught him that servicing can become staff-intensive and quite expensive when things go bad. Even when things are on a steadier keel, he said, servicing requires devoting staff, space, and equipment that he'd just as soon apply to other activities.
Though larger banks' mortgage banking operations are much more likely to buy or sell rights, some don't sell and rarely buy.
For example, at $7.5 billion-servicing NBD Mortgage Co., Troy, Mich., lenders make a point of the fact that NBD does not generally sell mortgage servicing rights, according to Thomas J. McDowell, president. McDowell explains that many potential borrowers have had bad experiences when their mortgages have been transferred to other servicers. They appreciate the assurance that NBD prefers to keep them.
"NBD's policy is that when we make a loan to a customer, they are our customer," McDowell explains.
SIGNIFICANT MARKET. Packages of servicing rights can trade in the low millions ranging up to even the low billions. In 1992, a total of $186.3 billion in servicing rights on loans sold into the three major government-related mortgage agencies' programs changed hands, according to servicing broker Hamilton, Carter, Smith & Co.
The Beverly Hills-based firm expects 1993 volume to be about the same, given similar market conditions. …