TUKWILA, Wash. – Retain servicing of members’ mortgages or release the servicing? As any credit union that offers mortgages knows, there’s no easy answer or even one answer to the question.
While servicing has always been an important issue for credit unions, Joe Brancucci opines that some credit unions’ appetites were whet during the recent refinance boom. They saw the revenue they could earn on the high volume of mortgages being transacted with servicing released.
The Prime Alliance Solutions president believes that, “Every credit union needs to make its own decision, and I respect their right to do so. Hopefully they’re making an informed decision.” He also stresses credit unions need to realize, “If someone’s willing to pay me a lot for something, namely servicing my loans, it must be worth something.”
That something, says Brancucci, is the relationship with the member. “The servicing providers are after the value of the relationship with the credit union member, that they’ll be able to cross-sell the member other products and services.”
Members who have a mortgage with their credit union have almost twice the number of relationships with the credit union than those that don’t. All external studies about mortgages show the majority of consumers who have a mortgage consider that financial their primary financial institution,” he said. The issue of retaining or releasing mortgage servicing was a topic of discussion at the recently held CU Housing Roundtable co-hosted by Prime Alliance and BECU. Attendees tried to rationalize why a credit union would want to sell servicing released. Brancucci said no one could come up with a good reason for doing it. Nathan Hagen agrees that a credit union’s decision whether to retain or release servicing is an individual one that each credit union has to make based on their own circumstances. The president of Boston-based Secondary Marketing Resources, which consults with credit unions on secondary marketing strategies, elaborated on the topic during a recent Callahan & Associates Webinar on “Optimizing Performance Using the Secondary Market.” Whatever the decision, it’s important for the CU to remember it’s not cast in stone. For example, more than one strategy can be used, he offered. A credit union can retain some loans and release others, and it can retain them at certain times and not at others. In addition, a servicing strategy can include several elements such as including a non-solicitation clause in wholesale agreements or using a maintained servicing option. “Contrary to what some credit unions think, there is no right or wrong decision when it comes to mortgage servicing. There is a middle ground, and we’re going to increasingly see credit unions use a mixed strategy as a way to manage portfolio risk,” says Hagen. He also stresses it’s important for credit unions to ask all the necessary questions before they make a decision “so they go into that decision with both eyes open.” It’s exactly because it’s a long-term decision that Hagen says some credit unions shy away from retaining servicing.
“It’s easier to say I’m going to sell the servicing, get the money and move on,” he says. “Sometimes that’s just an easier decision to make. But credit unions mistakenly think selling the servicing gets them out of a long-term commitment. It still is one.”
Regardless of which door a credit union changes, “there is no right or wrong decision, even though there are some credit unions that think of it that way,” Hagen says.
When deciding whether it wants to retain or release servicing, a CU first needs to consider the servicing value, keeping in mind that the value isn’t consistent, but changes as it’s impacted by interest rate changes, fluctuations in supply and demand and the effect of early prepayment.
In the Callahan Webinar, Hagen explained that servicing value is based 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 the expense of servicing the loan. Hagen says there is typically a 25 basis point spread to collect payment on a mortgage loan. With the industry 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 after expenses.
Hagen stresses though that this is a “very rudimentary” calculation, and there are other factors like taxes and insurance payments that have to be considered.
Still, he understands the reasons why some CUs opt to sell servicing. For example, there are financial risks if members prepay loans and the CU doesn’t realize the expected servicing income. Some CUs also don’t have the staff or operational functionality to do servicing.
But echoing Brancucci’s comments, Hagen says there are indirect financial benefits to retaining servicing that a credit union has to weigh when making its decision, namely being considered the member’s PFI.
Brancucci puts it this way: “Servicing is an expense that some credit unions don’t want to deal with. They’d rather originate the loan, close it, sell it, and move on to the next loan. That’s not a bad model, but credit unions are built on relationships.” -