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Way too many years ago, when I first started in the mortgage business, the emphasis was still on loan originations. But, it was also on the loan’s ongoing performance.
Lenders originated but most also serviced the loans they made. Independent Mortgage Lenders and some Banks originated government loans that were sold into Ginnie Mae pools. Other Banks and S & L’s (Savings and Loan Associations for the younger crowd) held their loans in portfolio as investments.
The loan’s performance after closing was just as important to the lender as was the income realized from its origination. Some loans were actually made at breakeven or a small loss just to bring on the servicing revenue or desired investment returns. Lenders were tied to their loans from beginning to end. They had a vested interest in the borrower making their payments.
Missed payments and defaults cost lenders money in lost anticipated income and in required advances into the loan pools. If a borrower, whose loan was in a Ginnie pool, missed a payment the servicing lender had to advance the required principal and interest payment to the pool. Too many defaults could lead to a hefty required monthly advance. Not good for any lender.
Lenders had skin in the game. They needed ample net worth and access to capital to ensure they could cover advances and loan losses so they could stay in the game. With the advent of advanced secondary markets, the agencies, wholesale and correspondent lenders things changed.
The originating lender very rarely is the entity that retains and/or services the loan. Loans are aggregated with weighted averages to spread the risk and maximize the returns. Who ends up having skin in the game, and how much is exposed? All depends.
As a result of what happened with the crash of 2007/2008, Congress decided that all lenders, at every level, needed to share some risk.
If they did not have a direct risk/reward scenario from the loan’s origination, then they had the risk from regulatory requirements and the potential for fines and penalties when things weren’t done right.
So like or not, through CFPB and related regulations, Congress has ensured that everyone involved in the loan origination process now has a vested interest in a loan’s performance and in consumer protection. That’s not so bad.
After all, most lenders have always had these interests at heart, it’s just that they got a little off track when trying to expand the opportunities to more consumers to help them realize the American Dream. A noble cause but one that didn’t turn out so well.
Once again quality is king. Loan quality and performance is equally as important as loan originations and pricing. Everyone has some skin in the game. That’s why it’s so important to do things right, for all the right reasons.
Are you doing what you need to do to protect your skin?
Another solid post. Here is a slightly different take. Specialization changed the incentives, but also led to significant productivity gains. The simple change to require originators to retain servicing retention would have positively shifted the risk and reward alignment. I joined industry leaders in advocating for the restoration of the seller/servicer model post-crisis and pre-Dodd Frank, but to no avail. Instead we ended up the CFPB that created a maze of disincentives and misalignment of risk. I’d paraphrase Mike’s line – “Are you doing what you need to do to protect your hide?”