The collection and processing of home mortgage payments is not as easy as it used to be. Increasing numbers of servicers are outsourcing all or some servicing responsibilities rather than investing in expensive technology to handle growing volume as well as quirky loan products that are becoming more common.
Subservicing, as the practice is called, lets small to midsize companies reap the benefits of large volume and high technology without making the financial commitment themselves.
Servicers may outsource portions of their portfolios that they are ill- equipped to service efficiently themselves. Examples are B and C loans - loans of subprime quality that need more attention - or niche products, such as reverse mortgages.
Not long ago, adjustable-rate loans were considered unusual products that needed special handling, said Michael A. Hyman, senior vice president at Wendover Funding Inc., Greensboro, N.C. Today, there are more-complex loan products. Servicers like retaining the servicing rights to unusual loans, which often bring in more money than plain-vanilla loans, but would rather not do the servicing chores.
Today, Wendover handles reverse mortgages, where the borrower receives a monthly payment and pays back the loan when the house is sold; low-credit- quality loans, which often require more handling than other loans; and loans that are in danger of going into default.
The business is not for everyone. "This cannot be a hobby," said William A. Mynatt Jr., chairman, president, and chief executive of Dovenmuehle Mortgage Inc., Schaumburg, Ill., another large subservicer. Dovenmuehle subservices about $16 billion of mortgages.
"When someone comes into this business and slashes costs to get business, they often find out they don't like it once they get to know it," Mr. Mynatt said. "We have seen that from time to time, and the company usually gets out."
Both Mr. Mynatt and Mr. Hyman say subservicers should have the most up- to-date technology to keep costs down and service the loans for less than it would cost their clients to do it themselves.
Dovenmuehle's technology allows its clients to tap directly into a computer system to access information about the loans being serviced that is updated daily, Mr. Mynatt said. That way, the clients can manage their own portfolios like they would if they did their own servicing, he said.
Mr. Hyman said 50 of Wendover's 400 employees have systems-related jobs, including programmers and support staff.
The technology helps keep servicing costs down. Mr. Mynatt said he tells clients they should subservice their loans if Dovenmuehle can save them at least $50 a year for each loan serviced. He was quick to add that most of Dovenmuehle's clients save more than that. But the first thing Mr. Mynatt said he advises potential clients to evaluate honestly the cost to service loans with all overhead and other costs fully allocated, not just the incremental cost of adding loans.
Industry consolidation has brought more business to subservicers, as servicers are forced to analyze their costs and choose the lowest-cost solution.
"Whether an institution has 1,000 or 20,000 loans, consolidation forces them to better analyze their costs," Mr. Mynatt said. "If an institution is not cost-competitive with the largest servicers, if they intend to survive in this business, they should put themselves in a position to be cost- competitive."
There have been a few instances where a servicer bought a portfolio from a company that had been using Dovenmuehle as a subservicer, Mr. Mynatt said, and not only decided to continue to outsource that portfolio, but sent some of its own servicing to Dovenmuehle.
Most servicers agree that the way to make money in the business is to beef up volume. But Dovenmuehle manages to squeeze out profits for the smaller subservicing fees, and Mr. Mynatt said his company's ability to service efficiently is more important than volume.
"Volume is very important, but servicers in the top 10 that would be considered the megaservicers are nowhere near as efficient as we are," Mr. Mynatt said.
"The management and employees of our organization have a commitment to driving costs down. It has to do with the intensity of our management and their goal. Another company might be caught up worrying about their volume of originations or some other point. We worry about servicing," he said.
Part of that commitment includes giving clients whatever they might need. Among other things, that means staying away from the origination side of the business to avoid competing with their clients.