To Retain or Not to Retain – What Is Your Servicing Strategy?
By Bill Dolan, CMB, AMP
In rummaging around for my turkey baster last week, I came upon my Magic 8 Ball and asked “Should my client’s servicing strategy be to retain, release or a combination of both?” The response came back, “It all depends.”
As lenders, it is crucial that you have a distinctly defined servicing strategy. If you decide to retain servicing on loans to the secondary mortgage market, you automatically create a mortgage servicing right (MSR) asset which should include a fairly comprehensive review and understanding of both the risks and the rewards of servicing. This type of analysis should be constantly evaluated and examined using supported data.
As a bank, your decision should center around the capital needed to retain servicing and the challenges you face with MSR capital requirements. Though your institution may have the capability to generate fee income and earn float on your escrow accounts while retaining customers for cross-selling opportunities, analysis must be performed in terms of the MSR capital rules that are in place today.
For financial institutions that maintain their own servicing operations, maintaining servicing efficiency is a real challenge and can be a real balancing act – your ability to servicing scale and performance while controlling servicing expenses can present additional risk.
With 2021 around the corner will we see a post-COVID effect on non-performing loan servicing costs (commercial and residential) along with origination margins that may tighten? The combination could have a dramatic consequence on a bank’s ability to meet capital requirements.
Several clients I spoke with are flush with cash from the windfall experienced on the origination and secondary market side of the business this year. Those who were prudent, set a portion of that income aside for loan loss reserve and technology upgrades in 2021, as many are forecasting potential delinquency problems within their commercial portfolios next year. The common adage that cash is king may hold for some, but for banks capital is king.
Still others addressed the prepayment speeds and run-off depleting their current residential portfolios and are looking for alternatives to replenish as quickly as possible.
If you are unsure as to what your game plan or strategy will be involving releasing/retaining servicing or increasing/decreasing mortgage assets on the balance sheet as well as the headaches and time consumed on mark-to-market reporting manually, the industry partnerships our Secondary Mortgage and Servicing Consultants maintain with SCA’s Mortgage Exchange for buying/selling those mortgage assets keep us at the forefront as a leading solutions provider.
To arrange a free consultation to discuss these and other services SCA can provide you, please contact Bill Dolan at (617) 694-2617 or visit our website at: www.scapartnering.com.
