TUKWILA, Wash. – Retain servicing of members' mortgages orrelease the servicing? As any credit union that offers mortgagesknows, there's no easy answer or even one answer to thequestion.

While servicing has always been an important issue for creditunions, Joe Brancucci opines that some credit unions' appetiteswere whet during the recent refinance boom. They saw the revenuethey could earn on the high volume of mortgages being transactedwith servicing released.

The Prime Alliance Solutions president believes that, “Everycredit union needs to make its own decision, and I respect theirright to do so. Hopefully they're making an informed decision.” Healso stresses credit unions need to realize, “If someone's willingto pay me a lot for something, namely servicing my loans, it mustbe worth something.”

That something, says Brancucci, is the relationship with themember. “The servicing providers are after the value of therelationship with the credit union member, that they'll be able tocross-sell the member other products and services.”

Members who have a mortgage with their credit union have almosttwice the number of relationships with the credit union than thosethat don't. All external studies about mortgages show the majorityof consumers who have a mortgage consider that financial theirprimary financial institution,” he said. The issue of retaining orreleasing mortgage servicing was a topic of discussion at therecently held CU Housing Roundtable co-hosted by Prime Alliance andBECU. Attendees tried to rationalize why a credit union would wantto sell servicing released. Brancucci said no one could come upwith a good reason for doing it. Nathan Hagen agrees that a creditunion's decision whether to retain or release servicing is anindividual one that each credit union has to make based on theirown circumstances. The president of Boston-based SecondaryMarketing Resources, which consults with credit unions on secondarymarketing strategies, elaborated on the topic during a recentCallahan & Associates Webinar on “Optimizing Performance Usingthe Secondary Market.” Whatever the decision, it's important forthe CU to remember it's not cast in stone. For example, more thanone strategy can be used, he offered. A credit union can retainsome loans and release others, and it can retain them at certaintimes and not at others. In addition, a servicing strategy caninclude several elements such as including a non-solicitationclause in wholesale agreements or using a maintained servicingoption. “Contrary to what some credit unions think, there is noright or wrong decision when it comes to mortgage servicing. Thereis a middle ground, and we're going to increasingly see creditunions use a mixed strategy as a way to manage portfolio risk,”says Hagen. He also stresses it's important for credit unions toask all the necessary questions before they make a decision “sothey go into that decision with both eyes open.” It's exactlybecause it's a long-term decision that Hagen says some creditunions shy away from retaining servicing.

“It's easier to say I'm going to sell the servicing, get themoney and move on,” he says. “Sometimes that's just an easierdecision to make. But credit unions mistakenly think selling theservicing gets them out of a long-term commitment. It still isone.”

Regardless of which door a credit union changes, “there is noright or wrong decision, even though there are some credit unionsthat think of it that way,” Hagen says.

When deciding whether it wants to retain or release servicing, aCU first needs to consider the servicing value, keeping in mindthat the value isn't consistent, but changes as it's impacted byinterest rate changes, fluctuations in supply and demand and theeffect of early prepayment.

In the Callahan Webinar, Hagen explained that servicing value isbased on four primary factors-servicing spread, cost to service,loan amount, and anticipated life of the loan.

The economic value, though, has to be weighed against theexpense of servicing the loan. Hagen says there is typically a 25basis point spread to collect payment on a mortgage loan. With theindustry average of cost of servicing a loan being $70-$120 a year,a credit union could assume on a seven-year term of servicing a$150,000 loan that it would collect $2,100 in net income afterexpenses.

Hagen stresses though that this is a “very rudimentary”calculation, and there are other factors like taxes and insurancepayments that have to be considered.

Still, he understands the reasons why some CUs opt to sellservicing. For example, there are financial risks if members prepayloans and the CU doesn't realize the expected servicing income.Some CUs also don't have the staff or operational functionality todo servicing.

But echoing Brancucci's comments, Hagen says there are indirectfinancial benefits to retaining servicing that a credit union hasto weigh when making its decision, namely being considered themember's PFI.

Brancucci puts it this way: “Servicing is an expense that somecredit unions don't want to deal with. They'd rather originate theloan, close it, sell it, and move on to the next loan. That's not abad model, but credit unions are built on relationships.” -

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