In my GSE series of articles, they have all been written with the spirit of providing content that can and is used by my audience. As we know and experience every day - the rules and requirements of being successful in today’s lending world change regularly and impact the loan origination processes and then the end game – the loan servicing operations.
IMB’s, Community Banks, Credit Unions are either successful in understanding the complexities of retaining the loan servicing in-house or opting to sell loans on a service-released basis. The ability of a lender to navigate these very different secondary market options is a mandatory factor to consider.
Typically, lenders will view this topic in two ways:
Is your business model and immediate income stream dependent upon the value paid for the loan servicing on a service-released basis, or
Does your business have the experience, infrastructure to service loans generating income and taking projected risk and reward regarding the loan’s performance over the life of the loan.
Additionally, if your firm is looking to get approved with either Fannie Mae or Freddie Mac, the ability to service loans in-house or outsource this function to a Sub-Servicer are the customary options. The lender is approved as a Seller/Servicer with either of the GSE’s, remains as the Master Servicer, and the firm that is hired to service the loans on a day-to-day basis is referred to as the Sub-Servicer.
Sounds like an easy decision, hiring a Sub-Servicer, right? After all the Sub-Servicer performs the daily loan servicing functions to a Sub-Servicer who is adept in meeting all regulatory and investor guidelines. The lender gets a “package deal”, they don’t have to have a large servicing operation, deal with regulatory compliance updates, administration, and invest in technology and people.
The right answer is dependent upon the budgetary investment, along with time, talent and effort it takes to build out a Loan Servicing Department over that of working with a Sub-Servicer. Even if your firm decides on hiring a Sub-Servicer, your firm is the Master Servicer and is responsible for oversight of the Sub-Servicer. That means, you must have a team that can conduct daily and consistent methods in which it monitors, reviews, interacts with, and is current on regulatory changes, and best servicing practices. The team basically makes sure the Sub-Servicer and is actually doing the job to your firm’s expectations, service-level agreements, and in accordance with GSE and Ginnie Mae requirements.
That being said, there are other options when working with the GSE’s. Both Fannie Mae and Freddie Mac offer the ability for a lender to sell loans through their service-released options. This gives your firm the benefit of being approved with the GSE’s and making strategic decisions to either sell direct to the GSE’s and retain the servicing or sell on a service-released basis to the GSE’s under their service-released options. If your firm were to move in this direction there is more than one execution model that the Secondary Marketing Department can have in their “toolkit.”
Additionally, if you opt to keep your loan servicing rights in-house and decide at a future date to sell the MSR that is totally viable, too. The methods in which loan servicing rights are sold can be in various forms, a Co-Issue structure, or a Bulk Sale structure as two examples.
The point of this article is to guide your leadership team to the fact there are not just two ways in which to do business as noted in the introduction. There are many ways in which to look at your business structure, obtain GSE Seller/Servicer approval, and then develop the flexibility to implement various secondary market execution strategies over time. At the end of the day, being open minded to what these options look like, how they “fit” with your firm’s long-term business strategy is what builds ongoing sustainability for your firm.
As a former Capital Markets Executive in a key leadership role where mortgage company volume went from $150 mx originations a year to $4 billion per year, I learned that having “options” is the best answer. It can be way too easy, and frankly dangerous in today’s ever-changing world to not look at things differently. When you can change your overall company’s culture to focus on the bigger picture with a strategic road map, the better positioned and leveraged your firm will be - now and in the future.
If your firm is at the beginning point, I highly recommend hiring a consulting firm who can offer building out your firm’s GSE roadmap. This process can readily aid senior leadership is determining beyond the visionary statement of “We need to ….” to a written document that outlines key steps to get to the “We are now ….”. Having the best forward thinking and working document and consulting expertise will aid you as a key leader in your firm to get through the finish line.
The team at BlackFin Group brings to the table many years of experience working at various lending firms and we look forward to partnering with you on your business needs – simply reach out.
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. Her understanding of 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