Rising property values and low interest rates pushed mortgage loan origination volume to roughly $4 trillion in 2021, and community banks benefitted from the housing surge. According to the FDIC Call Reports, community bank loan volume rose 3.7% year-over-year in 2021. While the influx of new mortgage loans provides opportunities to grow, the increased loan volume means community banks must build an effective strategy for selling and servicing the larger portfolio.
Many banks sell mortgage assets to secondary market investors while retaining servicing. To make this work, servicers must be able to effectively manage investor reporting and regulatory compliance. By investing in the right mortgage servicing software, banks can efficiently service their loans in-house, creating value for their organization and its customers.
Why Community Banks Should Retain Mortgage Servicing
Retaining servicing for loans sold on the secondary market benefits both banks and their customers. First, greater liquidity means banks can serve more customers. Selling loans to investors provides that liquidity and enables the community bank to free up funds for additional lending. It also means these institutions can offer loan products that they would not normally hold in their own portfolios, making more options available to customers.
Second, by retaining servicing, banks preserve their servicing revenue stream, which can be a major source of income. In addition to the contractual servicing fee paid by each investor, banks are compensated for their servicing activities through ancillary income from late fees, commissions on optional insurance (credit life, accidental death, disability, etc.), and miscellaneous fees and benefits of compensating balances from custodial funds.
But perhaps the biggest benefit to banks is the opportunity to build stronger relationships with customers and increase customer satisfaction. Transferring servicing to another institution jeopardizes customer satisfaction. Customers whose loans are transferred have significantly lower satisfaction scores and more problems with payment and escrow accounts than borrowers who chose their mortgage servicer. JD Power’s 2019 “U.S. Primary Mortgage Servicer Satisfaction Study” found 54% percent of first-time home buyers say they are confused, angry or irritated when their loan is transferred.
Historically, community banks have been known for their commitment to service. By focusing on customer engagement, bank staff build lifetime relationships and customer loyalty. Retaining servicing also offers opportunities for cross selling additional products. J.D. Power’s 2021 U.S. Primary Mortgage Servicing Satisfaction Survey found that satisfaction scores among customers who also use their servicer’s other financial products are 55 points higher than among those who have mortgage-only relationships.
By retaining servicing when they sell loans, banks avoid the risk that some other mortgage servicer would provide substandard customer service that could damage the bank’s relationship with its customers. Customers are not the only stakeholders who must be satisfied during the mortgage servicing process, however.
The Importance of Automated Investor Reporting
Mortgage servicers must comply with investor reporting requirements and accurately communicate the status of the loans in their portfolio. Most loans sold on the secondary market will be purchased by the nation’s largest investors, Fannie Mae and Freddie Mac. These Government Sponsored Enterprise (GSE) investors have specific reporting requirements. The bank’s servicing staff must report payment and default activity to the GSEs. They must also meet the daily and monthly funding requirements, satisfy other specific reporting requirements, and clear any reporting or drafting discrepancies. Finally, the custodial accounts must be reconciled.
And that’s just the basics. Additional requirements can be added at any time with a short turnaround time, as we saw during the COVID pandemic when the GSEs imposed additional reporting requirements for borrowers in forbearance. Freddie Mac and Fannie Mae, for example, introduced new reporting requirements ahead of the Cares Act changes regarding credit bureau reporting—as well as many other changes to quickly adapt to the increased forbearance activity.
Keeping investors informed during the mortgage servicing process can be time consuming and has traditionally introduced friction into the process, increasing costs and compliance risk in a part of the business with narrow profit margins. Keeping up with changing compliance requirements adds to the complexity. To efficiently service loans sold on the secondary market, banks need robust mortgage servicing software that automates the investor reporting process and is quickly updated in response to changing requirements.
Mortgage Servicing Software Automates Investor Reporting
Some bank servicers opt to service mortgage loans using the limited tools built into their core processing system. They may do this to save money and process the loans as internal loans similar to auto and personal loans. However, using the core system to service mortgage loans can be problematic given their greater regulatory requirements. While core systems support many products, mortgage loan functionality is often limited, especially when it comes to effective investor reporting and compliance. Core system limitations may require the bank’s servicing staff to perform investor reporting and escrow administration tasks manually. Management may see manual processing as a viable option because mortgage loan volume is typically lower than consumer loans. However, this slows down the process, negating the benefit that the core system automation was supposed to provide and increasing the risk that errors will occur.
Instead of performing investor reporting tasks manually, servicing staff should spend their valuable time providing personalized service to bank customers. Banks should invest in software that was specifically designed for mortgage servicing. Leading-edge mortgage servicing software automates investor reporting, facilitating adherence to regulatory and investor requirements by (a) supporting all industry-standard reporting methods, (b) producing reconciliation, remittance, delinquency, prepaid and trial balance reports, and (c) performing advance and recovery of Principal and Interest (P&I) and Taxes and Insurance (T&I).
The best mortgage servicing software provides the functionality to successfully service loans and automate reporting to the GSEs and financial institution core systems. A strong integration between the core and servicing systems provides updated loan data when it’s needed by bank staff to better service the customers. By working with a mortgage software partner with a proven record in the industry and good relationships with investors, bank executives can feel confident that their technology will deliver maximum efficiencies, freeing their staff to deliver prompt, personalized customer service.
Technology drives every aspect of mortgage banking today—and mortgage servicing is no exception. Automating servicing operations—especially investor reporting—is essential. Investing in robust mortgage servicing software facilitates in-house servicing, increases efficiency, and improves customer service, making banks more profitable and competitive.
About the author
Susan Graham is president and chief operating officer of FICS (Financial Industry Computer Systems, Inc.), a mortgage software company specializing in cost-effective, in-house mortgage loan origination, residential mortgage-servicing and commercial mortgage-servicing software for mortgage lenders, banks, and credit unions. She can be reached at email@example.com.