The great majority of loans today are serviced by firms that don't own them. The servicer is paid by, and is beholden to the owner of the mortgage. Borrowers have no say in who services their loan, and if they get poor service, about all they can do is write a letter of complaint to the Department of Housing and Urban Development (HUD). Therefore, it is hardly surprising that servicing does not generally meet the needs of borrowers.
But it doesn't have to be that way. Servicing systems can be designed to meet the needs of borrowers, who would pay for the service. The borrower would be the client rather than the lender, and could fire the servicer if he messed up.
A servicing system for borrowers (SSB) would not replace existing servicing systems. The firms providing the services described below could be called “second-tier servicers.” Borrowers would make their payments to second-tier servicers, who would then make payments to the primary servicers.
With the payments going through its hands, the second-tier servicer has command of information on the borrower's payment history. In contrast to the primary servicer, however, the second tier servicer will use the information to provide useful services to the borrower. The services, for which the borrower will pay a modest monthly fee, will be provided over the Internet.
Access to Payment History: The major purpose of this service is to provide peace of mind that the lender is properly crediting mortgage payments. Many borrowers, and especially those who make extra payments, are extremely anxious about this.
The SSB would allow borrowers to monitor their accounts continuously, and “what-if” capacity would allow them to experiment with different future payment patterns. This would allow borrowers to actively plan the amortization process, instead of passively watching it unfold.
Access to Details of ARM Rate Adjustments: The major purpose is to provide peace of mind that the new rate has been properly calculated. Adjustable-rate mortgage (ARM) borrowers worry about this. The SSB would show the details of the ARM rate adjustment, rather than just the resulting new rate, which is all they get now. Borrowers will also be able to forecast what the new rate will be months in advance so they can prepare for a possible refinancing.
Cost Reduction Refinance Opportunities: The purpose is to flag profitable refinance opportunities. The SSB would continually monitor the relationship between the borrower's interest rate, current market rates and the borrower's credit as affected by his mortgage payment record. On ARMs with rate adjustments scheduled within the next (say) 4 months, refinance analysis would be based on the new rate forecasted at the adjustment.
Cash-Raising Opportunities: The purpose is to provide borrowers who request it with a tool for assessing alternative ways to raise cash. The system would already know many of the required data inputs, including the borrower's existing mortgage balance and terms, as well as current market terms. Other data inputs, such as the amount of cash needed, would be entered by the borrower.
PMI Termination: The purpose is to give the borrower a “heads-up” that it may be possible to terminate mortgage insurance. This is a major concern to many borrowers because automatic termination under the Federal legislation passed in 1999 does not take account of extra payments to principal, or house price appreciation. Earlier termination that does take account of these factors requires that the borrower take the initiative. The SSB would do this for the borrower, flagging a termination opportunity when it arose.
Alternative Payment Options: The purpose is to allow borrowers to pay biweekly, bimonthly or weekly. Borrowers may prefer one of these options because they find the schedule more convenient, or because they want to build an early payoff plan around shorter payment periods.
The firms offering SSBs will be positioned to extract maximum value from them through the sale of services that borrowers may need. If the system reveals a refinance opportunity, for example, the second tier servicer will be much better positioned to become the new lender than the primary servicer. I am not able to reveal at this time, however, who these innovators will be.
Wednesday, June 13, 2007
Unhappy customers can do more than write to HUD
