In-house mortgage servicing model
With an in-house model, the servicer interacts directly with the borrowers, who are its customers. This gives servicers the ability to make necessary consumer experience adjustments and communicate in a speedier, more direct manner. In-house servicing also gives servicers more control over processes and allocation of resources, provides new cross-selling opportunities and naturally increases operational transparency. Done correctly, an in-house servicing model can also help drive a tailored experience that can boost primary financial relationships across a financial institution. With the degree of control enabled with an insourced model, firms can have purposeful engagement with their servicing customers and therefore enhance retention and their value propositions. This level of control can also allow servicers better transparency and oversight to key risk drivers and operational performance — although regulators have recently targeted in-house, outsourced and hybrid models alike. The downsides of in-house servicing can be the cost of technology and an increased cost to operate, especially at low volumes where proper scale cannot be achieved, including the need to recruit, train and retain a qualified loan servicing staff.
Mortgage subservicing model
Conversely, for subservicing vendors, both the bank servicer and the borrowers are customers. With this model, the primary upside for the bank is profitability as subservicers can offer a significantly lower cost to service per loan, especially if the bank is unable to scale up its existing volumes. Subservicers leverage existing infrastructure shared across multiple clients to lower unit costs with ready-made pieces, eliminating the requirement to procure the correct technology, people, etc., to build a servicing operation from scratch. Although subservicers perform the day-to-day mechanics of servicing, this model does not cure the lender of the primary risk and responsibility of compliance, controls and issue remediation. This necessitates that lender establish effective oversight models to ensure regulatory requirements and compliance controls are met throughout the servicing lifecycle. Poor oversight models can result in duplication of efforts, ineffective communication, incorrect staffing levels across functions and regulatory violations.
In addition, subservicers and their clients that do not correctly and consistently prioritize, triage and manage issues, and predict or prevent them from recurring run the risk of negatively impacting customers and running afoul of regulations. Reporting and management information systems are another key hurdle with this model. Although subservicers may use a variety of standard and add-on reporting functions, bank servicers must enable mechanisms to ingest canned reports and set up automated dashboards that can serve as a consolidated one-stop shop for all things oversight (e.g., key issues, complaints, escalations and regulatory exams), which would enable oversight functions and senior management to perform effective supervision. And while these obstacles, in addition to sacrificing personalization of the customer experience, are significant, cost considerations are prompting more and more organizations to select this servicing approach.