Servicing

Administering loans between the time of disbursement and the time the loan is fully paid off. Servicing includes collecting payments from the borrower, maintaining payment records, providing borrowers and investors with account statements, imposing late charges when the payment is late, and pursuing delinquent borrowers. In many cases, servicing agents also pay property taxes and insurance with money placed in escrow by the borrower. The Poor Quality of Servicing Overall: From a borrower perspective, the quality of servicing is generally low. The Department of Housing and Urban Development (HUD) reports that two of every five complaints they receive from borrowers involve servicing issues. J.D. Powers and Associates, which measures consumer satisfaction with business services of many kinds, reports that only 10% of borrowers are happy with their servicing agent. The financial incentives to provide good service, which work in other sectors of our economy, don't work for loan servicing. The borrower selects a lender or mortgage broker, not a servicing agent. The major focus is the price of the loan. Rarely if ever does the expected quality of servicing come into the picture. Information on the quality of servicing is not generally available, and even if it was, the borrower has no way to know that the lender making the loan will also be servicing it. Most loans are sold shortly after origination, and while servicing sometimes is retained by the seller, often it isn't. In addition, servicing contracts are bought and sold in an active market, much like bonds. This means that any borrower at any time can find his loan suddenly being serviced by a different firm. The fact that borrowers have little say in who services their loan would not be so bad if they could fire their servicing agent for poor performance, but they can't. The only way to rid yourself of a servicing agent is to refinance, but then you are gambling that the new one will be better, which is a bad bet. Since borrowers can neither choose nor fire their servicing agents, quality of service has no impact on an agent's bottom line. For most, there is no business reason to provide quality service to borrowers. Quality Servicing by a Few: A few enlightened firms have adopted the view that the borrowers they are servicing are potential customers for new services. A business strategy of 'targeted cross-selling' requires attention to service quality. A borrower who is miffed because his taxes weren't paid on time is a poor candidate for cross-selling. Unfortunately, this approach has not made major inroads in the industry. Predatory Servicing: At the opposite pole are the servicing predators, whose business strategy is to extract as much additional revenue from the borrowers they service as the law allows. Here is an outrageous example: A borrower made his monthly payment on the 16th of the month one day after the grace period. Without notice, the lender imposed a late charge on that payment, and then proceeded to collect that charge by deducting it from the following month's payment. That payment was made on time but recorded as late because of the deduction of the late charge from the previous month, which generated still another late charge. Seven consecutive payments were made on time but recorded as late because of the deduction of late charges on the prior payments. Predatory servicing agents who purchase servicing will examine each note to determine whether they are entitled to shorten the grace period or raise the late fee. If there is some excuse for considering the property to be under insured, the agent will purchase over-priced insurance and add the cost to the loan balance. Extra payments to principal will not be credited in a timely fashion and the borrower will not know because monthly statements are incomplete. Servicing for Borrowers: Under existing arrangements, servicing systems are designed to meet the needs of lenders and they won't meet the needs of borrowers until they are redesigned for that purpose. This is possible and may be in the cards. Borrowers must be willing to pay for the service. A servicing system for borrowers (SSB) would not replace existing servicing systems. The firms providing the services described below could be called 'second-tier servicers.' Borrowers would make their payments to second-tier servicers, which would then make payments to the primary servicers. With the payments going through its hands, the second-tier servicer has command of information on the borrower's payment history. In contrast to the primary servicer, however, the second-tier servicer will use the information to provide useful services to the borrower. Access to Payment History: The major purpose is to provide peace of mind that the lender is properly crediting mortgage payments. The SSB would allow borrowers to monitor their accounts continuously and the 'what-if' capacity would allow them to experiment with different future payment patterns. Access to Details of ARM Rate Adjustments: The major purpose is to provide peace of mind that the new rate has been properly calculated. The SSB would show the details of the ARM rate adjustment, rather than just the resulting new rate, which is all borrowers get now. Borrowers will also be able to forecast what the new rate will be months in advance so they can prepare for a possible refinancing. Cost-Reduction Refinance Opportunities: The purpose is to flag profitable refinance opportunities. The SSB would continually monitor the relationship between the borrower's interest rate, current market rates, and the borrower's credit as affected by his or her mortgage payment record. Cash-Raising Opportunities: The purpose is to provide borrowers who request it with a tool for assessing alternative ways to raise cash. The system would already know many of the required data inputs, including the borrower's existing mortgage balance and terms, as well as current market terms. Other data inputs, such as the amount of cash needed, would be entered by the borrower. PMI Termination: The purpose is to give the borrower a 'heads-up' that it may be possible to terminate mortgage insurance. Automatic termination under the federal legislation passed in 1999 does not take account of extra payments to principal or house price appreciation. Earlier termination that does take account of these factors requires that the borrower take the initiative. Alternative Payment Options: The purpose is to allow borrowers to pay biweekly, bimonthly, or weekly. Borrowers may prefer one of these options because they find the schedule more convenient or because they want to build an early payoff plan around shorter payment periods.