A growing number of mortgage companies are retaining servicing on mortgage loans to provide a steady stream of income as well as a sustained book of business.
In the past, when the price of servicing was low and the value of servicing was high, originators sold their servicing to larger aggregators. But since then, the market has shifted to where servicing has become more costly and less valuable to aggregators, mostly due to capital constraints.
Accordingly, mortgage originators have discovered that they can earn more income by servicing the loans themselves, either in-house, or through a subservicer. All the while, originators are also benefitting from keeping borrowers within reach for future business.
International City Mortgage (ICM), for example, a West coast-based lender, has been retaining its servicing for about a year and a half. Aside from the cash flow received from loan servicing premiums, it receives the “ancillary benefits from retaining the customer,” said Cory Hjelmeir, executive vice president of ICM.
Customers who stay within the mortgage company’s network are more likely to refinance or refer someone they know to their company, Hjelmeir said.
“It takes balance sheet and cash,” to retain servicing, so it doesn’t make sense for small guys to get in, he said. However, for small- to medium-sized origination companies, “it’s a smart time to retain servicing.”
Mortgage companies are retaining servicing at a time when origination volumes are expected to drop. The Mortgage Bankers Association estimates that 2014 origination volumes will drop to approximately US$ 1trn, from US$ 1.5trn in 2013 and US$ 1.75trn in 2012.
Investors and private investors still have not significantly increased their appetite for mortgage loan investments, according to mortgage company executive. Mortgages are still considered, “the ‘black sheep’ of the financial world,” he said,
Until those markets open up again, individual mortgage companies should bank on retaining the servicing and earning servicing revenues, he said.