By Roy Urrico
Mortgage performance has become more difficult for lenders lately. For example, foreclosures filed in 2022 climbed 115% from 2021 to 324,237 filings, according to ATTOM Data Solutions, a provider of nationwide property data, application programming interfaces (APIs), bulk data and real estate data. This is among the challenges facing credit unions, and other lenders, who must also deal with all facets of mortgage servicing including collections and loss mitigation.
Allen Price, senior vice president, head of sales, at BSI Financial Services met with Finopotamus to discuss how the Irving, Texas-based loan servicing company can help credit unions, reduce expenses and improve their technology by utilizing subservices on their loan portfolios.
Price said BSI manages approximately $70 billion in mortgage servicing rights (MSRs)— in which the right to service existing mortgages is sold by the original mortgage lender — for either itself or subservicing clients. “We have about 250,000 loans that we're servicing, a combination of what we own and also what's owned by others.” Price also pointed out BSI is on an aggressive growth path. “By end of fiscal year 2023, we expect the portfolio to probably be a little closer to about a half a million borrowers and cover about $65 billion to about $85 billion (in loans).
At Financial Institution’ Service
Price explained BSI works with credit unions, community and commercial banks, independent banks, hedge fund private equity customers, and other lenders, in several real estate financing areas.
Its capital markets execution business purchases MSRs from lenders. That covers organizations originating mortgages and selling them to agencies such as the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae).
Another area of focus is providing end-to-end servicing or subservicing solutions, which involves managing portfolios for clients that originate mortgages, but elect to retain the mortgages on their balance sheet.
“Credit unions typically retain those assets and then they will either service the assets in-house or outsource the servicing of those assets to a third party,” said Price. He added BSI, along with companies such as Dovenmuehle, Cenlar or LoanCare, are some of the larger subservicing companies in the mortgage space.
Price also noted that many credit unions begin by managing the assets themselves, but then often make the decision to outsource. The reason: the amount of time and resources invested (“there's real costs involved when you're servicing in-house”); and the level of regulatory scrutiny required when managing assets in house versus outsourcing that function.
Outsourcing Compliance Burdens
Price pointed out credit unions benefit from engaging a subservicer because it serves members regardless of their location. “Whether they are in your market, general footprint or outside of your market, outside of that general footprint,” suggested Price. That means not only basic checking and savings accounts but the capability to offer consumer related loan products, car loans and boat loans, student loans and home equity loans. “That is the core business of a credit union.”
What is not part of the credit union’s core business, according to Price, is servicing the loans. “That is not a core competency. Now plenty of them do it and do it well. I do not mean to suggest that credit unions cannot service their own portfolios. But when you talk about mortgage portfolios, given the amount of regulatory and compliance related functions that servicing a mortgage portfolio requires, in our view, [servicing] is not the best use of credit union dollars or time, quite frankly.”
Price suggested, “If you have a portfolio of less than 5,000 mortgage loans, it probably makes sense economically to do it in-house. Typically credit unions, especially small to mid-size, do not have the financial resources to pay for the kind of talent that you need when you have a couple of thousand loans on your books.”
Credit unions servicing loans in-house are still responsible for the oversight risk. “From an oversight perspective. The day-to-day risk of maintaining all the appropriate licenses falls with the credit union, explained Price. “You have to have a license for every state that you have a mortgage in, a license to collect in that state. The cost of licensing and keeping up with the licensing is very onerous and very expensive.”
Price advised one of the benefits to outsourcing is it reduces the regulatory and compliance burden because the credit union effectively offloads that responsibility from the financial institution’s platform onto the platform of a servicer.
Economy of Scale Passed on to CUs
Cost is another advantage of outsourcing mortgage services. “All I do is service for others,” said Price. “My entire infrastructure is built around that function. I have scale, I have close to 300,000 loans and by the end of the year I will have closer to 500,000 loans. So that is a big denominator.”
He added the economies of scale allow BSI to offer its services to credit unions “at significantly less cost than if (credit unions) were doing it themselves. On average, the cost of servicing a Fanny or Freddy loan is about $5.50 a loan.” Price emphasized, “That's very cheap. “The cost of servicing that same loan in-house by a credit union or some other financial intermediary is close to about nine bucks a loan.”
A third benefit comes from not having to deal with loss mitigation or delinquency situations. “What I have found with our credit union clients, they love their members, they are close to their members. They want to provide everything they can from financial services perspective to members,” said Price.
“Credit unions don't want to be known to their members as having to execute (loss mitigation) strategies or foreclosure strategies,” Price pointed out. He added, this is not across the board, some credit unions execute loss mitigation and delinquency strategies very well. “From a marketing perspective when loans go into default, when you outsource that function to a third party, the member is now disassociating the credit union from this foreclosure event.”
Servicing Certain Components
Price further explained that BSI can do end-to-end mortgage servicing, subservicing or approach MSRs in a component structure as well. “For example, I have a credit union client who only wants BSI to step in when the loan goes 60 days down. The credit union client handles the day to day, they collect payments, post payments, pay the escrows, all that for current borrowers.” Once a member becomes 60 days in arrears, the loan transfers from the credit union platform to the BSI platform to manage.
BSI also provides quality control functions. “We have credit union clients who only want to engage me to do (quality control) work on their platform,” he continued. “When they are originating loans, they want us to (quality control) the loan files or they want us to provide some backend post purchase (quality control) functions.”
Price said clients can operate with a BSI label or a private label. “When the member gets a statement, they see the credit union color scheme and logos or when they log into our system to look at their account, to make payments or to find out what is going on with their mortgage, it is all branded to the credit union. When they call, we have a telephony approach where we have some whisper technology so our operators know if it is a credit union client. (Members) hear ‘ABC Credit Union, may I help you?’”
Besides its headquarters near Dallas, BSI has offices in Titusville, Penn. and in New Delhi, India, where “a lot of back office functions and non-customer facing functions” take place. “All of our customer facing functions, customer care, all of that is done on shore. So, we do not do any, any customer facing, activities offshore,” said Price.