© 2012 Cengage Learning

© 2012 Cengage Learning© 2012 Cengage Learning

Residential Mortgage Lending:Principles and Practices, 6e

Chapter 16 Mortgage Loan Servicing and Administration

© 2012 Cengage Learning

Objectives• After completing this chapter, you should be able to:

– Explain why loan administration is so important to residential mortgage lenders

– Describe the responsibilities of a loan servicer– List the various functions performed by a loan admin istration

department– Explain how the typical functions of loan administration are

performed– Discuss the various ways that a department could be organized– Explain how servicing income is generated– Understand why a servicing portfolio has value

© 2012 Cengage Learning

Mortgage Payment Methods • Coupons - provided in one-year supply; mortgagor submits one with each

payment. The coupon will have on it the loan number, due date and payment amount (often this information can be encoded on the coupon for rapid and efficient processing).

• Monthly billing – servicer mails a bill to the borrower each month. Its main advantage is as a reminder that the payment is due, but the drawback is the mailing cost. Cross-selling other services by including advertising on the bill can offset this drawback.

• Regular USPS or express mail - The traditional manner in which the borrower writes a check and sends it with either the coupon or bill. Megaservicers use lock-box facilities to process the payments and apply to the loan account. Smaller servicers open their own mail and process it within the same servicing facility that the borrowers can visit for other business (i.e., the main office).

© 2012 Cengage Learning

Mortgage Payment Methods • Preauthorized automatic payment - Mortgage payment is

automatically deducted from the mortgagor’s depository account. This method assures prompt payments on the due date. This is a requirement for biweekly mortgages.

• Pay-by-phone - The borrower calls an 800 number and authorizes a certain amount from a certain depository account. Funds are transferred in batch processing from one institution to the other and applied automatically to the loan account.

• Online payment - The borrower visits the servicer’s Web site, logs into his secure account, and authorizes a certain amount from a certain depository account. Funds are transferred in batch processing from one institution to the other and applied automatically to the loan account. Once online, the borrower can access other loan data and even submit inquiries.

© 2012 Cengage Learning

Servicing Functions • Payment Processing Department • Loan Accounting Department • Customer Service Department • Escrow Administration Department • Collection Department • Real Estate Owned (REO) Department

© 2012 Cengage Learning

Causes of Mortgage Defaults• Financial problems• Loss of employment• Layoff or strike• Death of a wage earner• Credit over-extension or bankruptcy• Illness of a wage earner or mounting family medical expenses• Loss of wage as a result of accident• Marital problems• Mortgage payment changes due to ARM rate/payment or escrow

payment increases• Strategic foreclosures due to the borrower(s) losing all home equity

© 2012 Cengage Learning

What Do You Think?• Discuss the difference between mortgage

loan servicing and mortgage loan administration and how this difference impacts the lender.

• Explain the benefits and drawbacks to a unit vs. functional form of organization for a loan servicing/administration department.

© 2012 Cengage Learning

What Do You Think?• What are the various mortgage servicing

strategies implemented by lenders?

• List and explain mortgage servicing functions and responsibilities.

• How do refinance waves affect servicing departments (and lenders)?

© 2012 Cengage Learning

What Do You Think?• How does a lender determine its cost of

servicing and why is this important?

• How are servicing fees calculated? When does a servicer earn these fees?

• Explain the differences between servicing retained, servicing released, and subservicing.

© 2012 Cengage Learning

Check Your Understanding1. All residential mortgage loans require servicing. 2. The originating lender is not required to service a

mortgage loan, regardless of whether the particular loan is sold to an investor or held in portfolio.

3. Servicing responsibilities end when the loan is closed. 4. Many lenders use the post-closing review as a type of

quality control. 5. A servicing contract establishes the servicing

relationship when a mortgage is sold to an investor and the loan originator retains the servicing.

© 2012 Cengage Learning

Check Your Understanding6. Default on a mortgage loan can only occur if the

monthly payment is missed. 7. The law requires a mortgage lender wait 30 days after a

payment was due before beginning collection procedures.

8. A servicing release premium is paid to an acquiring investor to service loans sold.

9. All residential mortgage loans require the monthly collection of principle, interest and taxes.

10. Subservicing describes servicing done by a different department within a lending institution.