The cost of servicing mortgage loans has surged since the financial crisis. Will FinTech come to the rescue?
The mortgage lending industry is facing one its toughest market environments in years. Amid the apparent slowdown in origination volumes, excessive regulation has triggered a sharp rise in mortgage servicing costs. Once again, lenders are looking for revolutions in FinTech to tackle new cost burdens.
Since the financial crisis, change has become the new normal for the mortgage industry, with regulators and guarantors enhancing rules to protect borrowers and taxpayers. Although regulation has succeeded in stamping out excessive risk from the market, it has lacked consistency and prevented the mortgage servicing market from operating in an open and efficient manner. The problem is that the various regulatory entities have different oversight responsibilities, which has created a more complex environment for the mortgage business.
In response to increased regulation, servicers have bolstered their internal processes in order to remain compliant and avoid additional scrutiny. As one might expect, more attention to compliance has led to a sharp rise in costs.
The numbers certainly don’t lie. Between 2008 and 2015, the cost of servicing a performing loan tripled to $181, according to the Mortgage Bankers Association. In the same year, the cost of servicing a non-performing loan reached $2,386, almost five times higher than 2008 levels. There’s reason to believe loan servicing costs have increased over the past two years as regulatory bottlenecks, a volatile bond market and shrinking originations continue to hamper the mortgage business.
In the absence of sweeping regulatory reform, lenders are looking to FinTech to tackle rising cost burdens. In fact, technology is already being used to reduce the time to close a deal. Since the financial crisis, the industry has succeeded in reducing the time to a close from over 70 days down to just 20. At the same time, it’s clear that the industry cannot afford to support the servicing model it put in place following the crisis. In other words, “compliance-at-all-costs” can no longer be supported without a focus on profitability as well.
The typical mortgage servicer allocates roughly 15% of total costs to technology. As the number of software applications continues to grow, one of the primary goals of servicers should be to streamline and reduce technology complexity. This includes digitizing paper-based processes, enabling customer self-service and streamlining communications with customers through user interfaces, knowledge management and automated call-back services.
These FinTech solutions are designed to achieve one thing: increase the level of automation and straight-through-processing to boost efficiency and reduce the overall cost of delivery. Industry research shows that integrating FinTech solutions could deliver 40% cost reduction when compared to the mortgage industry’s current standard of practice.
For most servicers, FinTech means further consolidating technological processes already in place today. For larger mortgage players, it may also entail increased investment in intellectual property, such as APIs and templates.
The mortgage business may have a silver lining in the form of a presidential vow to roll back financial regulation. It didn’t take long for President Trump to call for a review of the Dodd-Frank Wall Street Reform and Consumer Protection Act. With new healthcare legislation failing in the Senate, tax reform and financial deregulation are the next priority areas for the White House.
 PricewaterhouseCoopers (August 2015). Landscape: A review of the mortgage servicing market’s recent history and the way forward.
 MBA Research & Economics (August 2, 2016). MBA Chart of the Week: Servicing Costs per Loan: Performing v. Non-Performing.
 Christopher Whalen (July 11, 2017). “What is causing considerable operational headaches in the mortgage sector.” Housing Wire.
 Biniam Gebre, Ahmet Hacikura and Vivian Merker (2016). A Model for Efficient Mortgage Servicing. Oliver Wyman.
 Andy Efstathiou (April 12, 2017). Mortgage & Loan BPO Challenged to Achieved Profits, but Turning to FinTech to Drive Efficiency Gains.” NelsonHall.