Ser­vic­ing

Mort­gage ser­vic­ing as­sets are poised for gains in 2019. But as higher mort­gage rates spur lenders to sell ser­vic­ing rights and di­ver­sify their loan of­fer­ings, ser­vicers’ work will also get more com­pli­cated and costly.

National Mortgage News - - Contents - By Bon­nie Sin­nock

Higher mort­gage rates could be a mixed bless­ing for ser­vicers

Mort­gage ser­vicers should ex­pect re­li­able prof­its in 2019, but orig­i­na­tion chal­lenges may spill over into their sec­tor in the form of op­er­a­tional com­plex­i­ties and higher costs.

Ser­vic­ing port­fo­lio runoff could de­crease and mort­gage ser­vic­ing rights val­u­a­tions could in­crease in 2019 in ways that bode well for ser­vicers, but con­tin­u­ing con­straints on orig­i­na­tions also could make their work more com­plex and ex­pen­sive.

Among other things, ser­vicers may have to jug­gle more sec­ondary mar­ket trans­fers of ser­vic­ing rights be­cause of it.

“There are a lot of ser­vic­ing trades right now,” Kevin Brun­gardt, CEO of RoundPoint Mort­gage Ser­vic­ing Corp., said in an in­ter­view. “Pro­duc­tion is down and the refi boom is kind of over. You’re see­ing a lot of mort­gage ser­vic­ing rights port­fo­lios trade off, and lot of mono­line lenders are look­ing for op­er­at­ing liq­uid­ity.”

That’s likely to only in­ten­sify in 2019. Most fore­casts call for higher rates. That could fur­ther di­min­ish loan vol­umes, and put more pres­sure on non­bank lenders to sell or fi­nance ser­vic­ing.

“De­pend­ing on whom you be­lieve, the Fed is apt to hike two to four times over the next 12 months and the 10-year Trea­sury yield could go back to some kind of nor­mal­ized level,” said Brun­gardt. “Mort­gage ser­vic­ing rights are a very valu­able as­set, and you’re see­ing a lot of hurt and pain on the lender side of the busi­ness. But if you have a ser­vic­ing po­si­tion, it could be a good year.”

For sub­ser­vicers, an uptick in trans­fers in 2019 as lenders re­lease more ser­vic­ing or or­ga­ni­za­tions con­sol­i­date could be a mixed bless­ing.

Sub­ser­vic­ing work might be more com­pli­cated though, be­cause clients that re­tained his­tor­i­cally, and are start­ing to sell, will only need sub­ser­vicers to han­dle their ser­vic­ing in the short-term, from af­ter orig­i­na­tion un­til it is sold.

“A trans­fer, de­pend­ing on where you sit, may or may not be good for your busi­ness,” said David Vida, ex­ec­u­tive vice pres­i­dent at Spe­cial­ized Loan Ser­vic­ing, a sub­sidiary of Com­put­er­share.

So can com­pa­nies make money in in­terim ser­vic­ing?

“Peo­ple need to pay you the right amount of money to board and de-board a loan. That’s where au­to­ma­tion, tech­nol­ogy, and a smart process make a huge dif­fer­ence,” said Vida. “It’s a thin-mar­gin busi­ness. Our chal­lenge is how to pro­vide a strong cus­tomer ex­pe­ri­ence while spend­ing less money.”

An­other trend sub­ser­vicers will have to con­tend with in 2019 is de­mand to ser­vice the grow­ing num­ber of home equity prod­ucts lenders are ex­pected to orig­i­nate if rates and home prices keep ris­ing.

“This year could be the year of home equity,” said Ga­gan Sharma, pres­i­dent and CEO at BSI Fi­nan­cial Ser­vices. The prod­uct is more com­pli­cated for mono­line ser­vicers to han­dle than tra­di­tional mort­gages be­cause of the mix of short-term draws and longer-term with­drawals that may be in­volved.

While most sub­ser­vicers and sub­ser­vicers are largely ex­pect­ing a con­tin­u­ing climb in home equity busi­ness as home prices and rates rise; they tend to also agree there are a cou­ple of risks to this fore­cast.

One com­mon con­cern is that the length of the re­cent eco­nomic ex­pan­sion sug­gests it is due for a re­ver­sal.

“I worry about the econ­omy,” said Sharma. “You have to ask, ‘Is this as good as it gets?’”

Among de­vel­op­ments that could weaken the mar­ket’s strong hous­ing and loan per­for­mance, or lower rates, are global tur­moil, ex­ces­sive dam­age from nat­u­ral dis­as­ters, the spread of lo­cal hous­ing bub­bles, or ex­ces­sive con­sumer debt.

“I don’t be­lieve the hous­ing mar­ket will be the cause of the next down­turn, but if there is ever a down­turn the hous­ing in­dus­try will def­i­nitely be im­pacted,” said Sharma.

So far, how­ever, there is lit­tle sign of any de­te­ri­o­ra­tion in mort­gage credit at Fan­nie Mae, the largest sec­ondary mar­ket buyer in the mar­ket.

“The Fan­nie delin­quency rate is the low­est is has been in some time,” Sharma noted.

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