“It wasn’t until the end of the year, or in the first quarter of 2021, that a few companies learned it might have been cheaper and easier to pay someone to take the loans when they were originated, especially in the instances where elevated levels of delinquencies or forbearance occurred,” Stratmor Principal Seth Sprague wrote in the firm’s latest Insights Report.

In his article, “What’s Keeping Mortgage Servicers Awake at Night?” Sprague explained that many lenders that had retained servicing last year did so because it looked like the best decision at the time.

However, some companies failed to take into consideration the quality of the loans going into their servicing portfolio before they opted to retain the servicing.

“Loading up a servicing portfolio with loans having FICO scores of 620 and below, 97 percent LTV, or FHA servicing that may be 10-15 percent in forbearance by the end of the year may not turn out to be a successful long-term strategy,” Sprague stated.

According to Stratmor data, between 20 percent and 30 percent of the loans offered to an aggregator are not immediately purchased due to issues or areas that need further clarification.

Companies that retained servicing in the hopes of selling mortgage servicing rights (MSR) later may also learn a difficult lesson, according to Sprague, as fair market values determined by an independent valuation firm could be materially different than cash received from an actual bulk sale.

In other words, sales may take more effort than initially thought.

“More importantly, not all servicing may have a buyer, and certain products could be excluded from a sale,” he added.

Sprague also noted that servicing costs have risen and will likely stay that way until loans in forbearance are worked out.

“Servicers must understand the true cash return on servicing and evaluate the cash implications of servicing in terms of offsetting the anticipated decline in origination income,” he wrote. “Having a properly modeled, calibrated, and continually tested and verified view of the actual MSR cash return is critical to understand whether the best execution decision results in an adequate cash return.”

Yet another concern for servicers is what will happen when COVID-19 forbearance ends.

“The new rules allow servicers to extend the forbearance period beyond 12 months, but to do so they must contact the borrower and verify the hardship. If they can’t reach the borrower, or the borrower refuses to allow the servicer to engage, the borrower will come out of forbearance,” Sprague noted.

Sprague encouraged lenders who decide to retain servicing to seek help if they need it from the Mortgage Bankers Association.

In addition, he advised lenders working with a sub-servicer to make sure they are on top of compliance oversight.

“People underestimate the size of the potential problem that could result from a lender who is new to a subservicing relationship doing a substandard job of compliance oversight,” Sprague wrote. “Regulators will have little patience for compliance mishaps. Responsibility will lie with the originator. There’s going to be enough money involved that we could see a fair amount of litigation before this is all over.”