Why Is Mortgage Servicing So Bad?
February 3, 2003, Revised December 13, 2004
The letter below is typical of many I have received on this theme.
"I have had 3 mortgages by 3 different lenders, and the service I received after the loans closed ranged from poor to abysmal. Have I had particularly bad luck… or is this a system-wide problem?”
It is a system-wide problem.
Servicing includes the collection of payments, maintaining accurate records of payments and balances, and often paying the borrowers’ taxes and insurance. Servicers also go after borrowers who are delinquent, and take their house if they default.
The Department of Housing and Urban Development (HUD) reports that two of every five complaints they receive from borrowers involve servicing issues. J.D. Powers and Associates, which measures consumer satisfaction with business services of many kinds, reports that only 10% of borrowers are happy with their home mortgage servicer.
The problem is that the financial incentives to provide good service, which work in other sectors of our economy, don’t work for loan servicing. A house painter, for example, is constantly under pressure to perform well. If he doesn’t have good references from previous clients, you won’t hire him. If the job is done poorly, you can resist paying. Even if you pay for a poor job, you won’t hire him again and won’t provide a reference.
The mortgage borrower’s relationship with the firm that services her loan is very different. The borrower does not select the servicer. She selects a lender or mortgage broker, and the major focus is the price of the loan. If service quality enters the equation, which it might if the borrower follows the recommendation of a real estate agent, it is about getting the loan closed on time. Rarely if ever does the quality of servicing come into the picture.
Neither mortgage brokers nor real estate agents care about servicing. Even if they did care, they can’t help borrowers find quality servicing because most of the lenders originating loans do not service them. More loans than not are sold shortly after origination, and while servicing sometimes is retained by the seller, often it isn’t.
Shopping for a mortgage loan is thus a little like shopping for a tail. You find the best one you can, and when you get it home you realize it is attached to a dog, of uncertain disposition, who you will be obliged to keep for many years.
In addition, servicing contracts are bought and sold in an active market, much like bonds. This means that any borrower at any time can find his loan suddenly being serviced by a different firm. With no warning, your dog disappears and there is a new one in the crate.
The fact that borrowers have little say in who services their loan would not be so bad if they could fire their servicer for poor performance, but they can’t. See Borrowers Should Be Able to Fire Mortgage Servicers. The only way to rid yourself of a servicer is to refinance, but then you are gambling that the new servicer will be better, which is a bad bet.
Since borrowers can neither choose nor fire servicers, quality of service has no impact on the servicer’s bottom line. There is no business reason to provide quality service to borrowers.
For many years I have been reading articles in the trade press about how all this was about to change. Mortgage servicers have discovered, or so it was claimed, that all these borrowers in their servicing files were potential customers for new services. Servicing files were a gold mine of information that would be used for “targetted cross-selling”.
The trouble is, a borrower who is miffed because his taxes weren’t paid on time, or because his last payment was presented on the 14th but held to the 16th to trigger a late charge, is a poor candidate for cross-selling. Except in isolated cases, this vast untapped market has remained untapped.
The one significant exception has been widespread efforts to alert borrowers to the possibility of a cost-reducing refinance. The focus of these efforts is to identify borrowers who are likely to refinance with someone else, so that the existing servicer can retain them. This hardly qualifies as quality servicing.
The bottom line is that servicing systems are designed to meet the needs of lenders, and they won’t meet the needs of borrowers until they are redesigned for that purpose. This may happen some day, but I would not hold my breath. See A Servicing Systems For Borrowers?
Dissatisfaction With Mortgage Servicing
The letter below is typical of many I have received on this theme.
"I have had 3 mortgages by 3 different lenders, and the service I received after the loans closed ranged from poor to abysmal. Have I had particularly bad luck… or is this a system-wide problem?”
It is a system-wide problem.
Servicing includes the collection of payments, maintaining accurate records of payments and balances, and often paying the borrowers’ taxes and insurance. Servicers also go after borrowers who are delinquent, and take their house if they default.
The Department of Housing and Urban Development (HUD) reports that two of every five complaints they receive from borrowers involve servicing issues. J.D. Powers and Associates, which measures consumer satisfaction with business services of many kinds, reports that only 10% of borrowers are happy with their home mortgage servicer.
Why Mortgage Servicing Is Bad
The problem is that the financial incentives to provide good service, which work in other sectors of our economy, don’t work for loan servicing. A house painter, for example, is constantly under pressure to perform well. If he doesn’t have good references from previous clients, you won’t hire him. If the job is done poorly, you can resist paying. Even if you pay for a poor job, you won’t hire him again and won’t provide a reference.
The mortgage borrower’s relationship with the firm that services her loan is very different. The borrower does not select the servicer. She selects a lender or mortgage broker, and the major focus is the price of the loan. If service quality enters the equation, which it might if the borrower follows the recommendation of a real estate agent, it is about getting the loan closed on time. Rarely if ever does the quality of servicing come into the picture.
Neither mortgage brokers nor real estate agents care about servicing. Even if they did care, they can’t help borrowers find quality servicing because most of the lenders originating loans do not service them. More loans than not are sold shortly after origination, and while servicing sometimes is retained by the seller, often it isn’t.
Shopping for a mortgage loan is thus a little like shopping for a tail. You find the best one you can, and when you get it home you realize it is attached to a dog, of uncertain disposition, who you will be obliged to keep for many years.
In addition, servicing contracts are bought and sold in an active market, much like bonds. This means that any borrower at any time can find his loan suddenly being serviced by a different firm. With no warning, your dog disappears and there is a new one in the crate.
Borrowers Can't Fire Their Servicer
The fact that borrowers have little say in who services their loan would not be so bad if they could fire their servicer for poor performance, but they can’t. See Borrowers Should Be Able to Fire Mortgage Servicers. The only way to rid yourself of a servicer is to refinance, but then you are gambling that the new servicer will be better, which is a bad bet.
Since borrowers can neither choose nor fire servicers, quality of service has no impact on the servicer’s bottom line. There is no business reason to provide quality service to borrowers.
For many years I have been reading articles in the trade press about how all this was about to change. Mortgage servicers have discovered, or so it was claimed, that all these borrowers in their servicing files were potential customers for new services. Servicing files were a gold mine of information that would be used for “targetted cross-selling”.
The trouble is, a borrower who is miffed because his taxes weren’t paid on time, or because his last payment was presented on the 14th but held to the 16th to trigger a late charge, is a poor candidate for cross-selling. Except in isolated cases, this vast untapped market has remained untapped.
The one significant exception has been widespread efforts to alert borrowers to the possibility of a cost-reducing refinance. The focus of these efforts is to identify borrowers who are likely to refinance with someone else, so that the existing servicer can retain them. This hardly qualifies as quality servicing.
The bottom line is that servicing systems are designed to meet the needs of lenders, and they won’t meet the needs of borrowers until they are redesigned for that purpose. This may happen some day, but I would not hold my breath. See A Servicing Systems For Borrowers?