Subservicing or in-house servicing: How to know what’s best for your operations

For homeowners, originating a loan is a major milestone in their homeownership journey. It is also an inflection point for mortgage companies. Once that loan closes, lenders make the important decision of whether to service that mortgage in-house, thereby managing the borrower’s monthly payments, taxes and insurance costs on their own, or whether to contract with a subservicer who will assume those day-to-day administrative duties instead.

While it might seem like the easier choice to let someone else handle a loan’s upkeep, there are important considerations to make. The following frequently asked questions will help you better understand the benefits and trade-offs of servicing a loan in-house versus using a subservicer.

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What is loan servicing?

Loan servicing occurs after the loan closes and funding is completed. It is the process of collecting monthly loan payments and managing the borrower’s annual taxes and insurance premiums using their escrow accounts.

Over the life of the loan, mortgage servicers can engage homeowners on steps they can take to modify their monthly payments to avoid default, their options for leveraging their home’s equity, or the feasibility of trading up or downsizing their homes. When necessary, mortgage servicers will also conduct and supervise the foreclosure process.

What is subservicing?

Subservicing is when one financial institution outsources some or all of the administrative loan servicing functions to another entity. Those tasks can include answering customer inquiries, collecting monthly mortgage payments, maintaining records and compliance, working with customers to return delinquent accounts to current, and more.

What are the benefits of using a subservicer?

Organizations who contract with a subservicer have the benefit of not needing to take on the employees necessary to staff a servicing department, and don’t have to manage the cost and overhead of that department themselves. That includes not only the personnel, but the employee training, software development, and systems maintenance. It also takes more time to get a full servicing department up and running — in comparison, using a subservicer is quicker.

Staffing an in-house servicing team can sometimes cost more than outsourcing to a subservicer. And even though financial institutions can reap more long-term benefits from servicing in-house, the immediate cost savings can be a major boon.

Especially for smaller financial institutions, subservicing can relieve an otherwise large burden.

What are some of the disadvantages of using a subservicer?

The biggest disadvantage financial institutions face when using a subservicer is that they relinquish control over the long-term customer relationship, which can last for years - if not decades - as homeowners pay down their loan.

Successful relationships with customers can often lead to the opportunity for repeat business. But when day-to-day administrative duties of the loan are contracted out to another organization, the subservicer becomes the primary point of contact for the remainder of the loan’s life. When your customers who you nurtured through the origination process no longer keep in direct contact with you, it makes it more difficult to retain their business or market additional loan opportunities, ie. home equity loans or HELOCs.

Some subservicers may also be more focused on growing their MSR portfolio than they are on investing in their people, technology, and regulatory controls. This can lead to the need for lenders to monitor their subservicing relationship to help make sure the organization is not cutting corners that may impact your business and your customers.

What are the benefits of servicing a loan in-house?

While contracting with a subservicer can be an effective business model for some organizations, there is no “one size fits all” answer when choosing how to service your customers’ loans, and subservicing should not be the immediate choice for every financial institution. In fact, there are several major advantages to servicing the loans you originate in-house.

Chief among them is the ability to exercise tighter control over the loan servicing life cycle, which can lead to a number of benefits. When servicing a loan for the extent of its life cycle, servicers can:

How does servicing a loan in-house reduce risk?

The rules around outsourcing have changed in recent years, and from a compliance standpoint, the lender who originated the loan could still be responsible for meeting the rules and regulations governing said loan. If the subservicer runs afoul of compliance guidelines, the original financial institution is ultimately responsible.

By servicing a loan in-house and using loan servicing software that helps organizations support compliance, you can reduce risk, and have greater confidence that your teams are meeting regulatory guidelines. The right system will support efficient processing from loan boarding to disposition, with tasks flowing seamlessly across functional areas to drive performance and improve communication and collaboration.

How does servicing a loan in-house help enhance the customer experience?

When you contract out the administrative duties of a loan, you are also contracting out the customer experience. Lenders work hard to build a positive relationship with customers during the origination process, and handing their loan over to a subservicer leaves that relationship in someone else’s hands. Like with the regulatory compliance example above, you cannot control how the subservicer continues the relationship you have begun. If the subservicer you’ve contracted with doesn’t live up to the experience you’ve set for your customers, it can be frustrating for the customer and they will be less likely to return to do more business.

Servicing loans in-house gives you the opportunity to increase touchpoints with your customers; to keep in contact with them and respond directly to their questions or concerns. It is a lender’s chance to continue the relationship you have built during the origination process, and maintain communication with customers who are already acclimated to working with you.

What type of repeat business opportunities can arise from in-house servicing?

Both the home equity and refinance spheres are strong areas of opportunity for lenders to work with and retain customers, and to open new avenues of potential revenue. Home equity loans and lines of credit are an attractive way for servicers to engage customers already in their portfolio, and HELOCs are especially appealing to many homeowners who might want to take advantage of their home’s equity without relinquishing their current interest rates. Providing additional financial options is not only good for homeowners — it is an effective customer retention tool for servicers as well.

How can in-house servicing help maintain a competitive edge?

Servicing in-house means you are in control of the technology your team uses, which is critically important since not all servicing systems are created equally. Choosing the right loan servicing software can help elevate you over the competition.

Leading-edge servicing systems are continually enhanced to deliver the latest advancements in digital technology, workflow automation and decisioning capabilities to help take servicing operations to the next level.

For example, servicers looking to capitalize on home equity, HELOC and refi opportunities would do well to consider a system that allows for home equity loans to be serviced on the same system as first-lien mortgages. Such a consolidation of technology helps financial institutions gain greater insight into their portfolio performance, mitigate risk and support evolving compliance requirements, and improve efficiencies across their organization.

Maintaining an in-house servicing operation on advanced servicing software also opens the door for your organization to use integrated data and analytics solutions to proactively evaluate opportunity in your portfolio and minimize risk. When the enterprise data is accessible within a single repository it becomes much easier for servicers to reduce risk and increase customer retention.

And if you need special configurations to better serve your customers or improve the experience for back-office employees, control over your technology gives you that opportunity rather than relying on whatever configurations an outside company provides.

How do you make the right decision that best fits your bottom line?

Servicing loans in-house and contracting the administrative overhead out to a subservicer each have their benefits, and businesses should carefully consider both.

Though lenders save time and resources when working with a subservicer, they can exercise less control over regulatory compliance, and they relinquish the opportunity to nurture the customer relationships they have built during the origination process. An experienced servicing technology provider can help financial institutions determine the right operations for their business based on unique factors like portfolio, growth, areas of expertise, and more. To make the right decision for your organization, you must determine your strategic goals with each customer interaction and visualize how you want to interact with the customer after the loan closes and into the future.