Mortgage brokerages are putting on a new face.
Laden with profits and eager to diversify their operations away from the waning refinance business, more brokers are undertaking servicing, according to servicers and brokers.
Most are using "subservicers" to do the processing work as they get their own portfolios started.
Brokers, who usually sell the servicing rights along with the loans, have taken on servicing before. But the number of brokers jumping into servicing has risen dramatically in the past year.
Clientele of Brokers Triples
At Wendover Funding Inc., Greensboro, N.C., one of the nation's largest subservicers, the number of clients that are brokers has tripled in a year. Subservicers perform processing and other tasks on behalf of the holders of the servicing rights.
Of Wendover's clients this year, 22% are brokers getting started in servicing. Last year, brokers were only 6% of the company's client pool.
"It was a small part of our business, but it really came out at the beginning of the refi boom," said Michael A. Hyman, senior vice president for marketing and contract administration at Wendover, a unit of State Street Bank and Trust Co.
In response, Mr. Hyman said, Wendover has enlarged its broker subservicing staff, called the flow-loan program.
Brokers say they benefit on several counts when they retain servicing.
They can defer taxes on originations by spreading some of the income into servicing. Also, servicing diversifies their operations beyond stamp-and-seal loan origination.
That diversification makes brokers financially more secure, said Larry B. Litton Sr., president and chief executive officer of Litton Mortgage Servicing Center Inc., Houston.
But not everyone thinks highly of brokerage business becoming servicers. Some mortgage brokers "do not have the depth internally to understand all the intricacies" of servicing, said Kirk R. Phillips, president and chief executive officer of First Security Mortgage Corp., a broker based in Columbia, S.C.
Now that some brokers have grown rich with refi money, a few are spending their cash recklessly, some in the industry say. "There are brokers out there with enough money to make them dangerous," Mr. Phillips said. But they won't last in servicing, he added.
"I liken it to a circus coming into town," Mr. Phillips said. "As long as people are lining up for tickets, everything is okay. As soon as you use up your resources in town, you've got to pack up your tent."
First Security applied to Fannie Mae and Freddie Mac two months ago for permission to retain the servicing of their loans. And they have already signed a subservicing contract with Carolina First Mortgage Co., Columbia, S.C.
Business Is Good
Mr. Phillips doesn't expect First Security to pack up its servicing tent quickly. He says mortgage banking experience at First Security will keep them servicing successfully.
Freddie Mac looks at a broker's financial standing, management, and staff before allowing it to retain servicing rights, said Walter Densmore, director of institutional eligibility at Freddie Mac. Mr. Densmore said the minimum net worth for approval was about $1 million.
The goal of First Security and other brokers that are retaining their servicing is to set up their own processing shop.
Alan H . Verch, senior vice president at Carolina First, estimates that brokers need about 5,000 loans in their portfolio before it becomes economical to set up their own servicing operation.
It costs as estimated $200,000 to get started in servicing, said Mr. Phillips of First Security.
He said subservicing is a perfect kickoff point for future servicers. A subservicer takes care of start-up costs and can allow a brokerage company to build its portfolio one loan at a time.
Subservicers generally charge by cash flow, expenses, and net worth of the customer. First Security will pay Carolina First about $80 to $120 a year to service a typical $100,000 30-year-fixed loan.
Brokers need to know the dangers of servicing, said Mr. Litton of Litton Mortgage Servicing.
He said most mortgage brokers did not realize, for example, that the servicer is responsible for dealing with foreclosures and delinquencies. "The people who end up with some problems are those who, off the cuff, say they want to own servicing rights," Mr. Litton said.