Chances are your CEO isn’t walking down to your office and declaring, “Hey, you get the deciding vote! Is this the correct price for this mortgage servicing rights portfolio?” As you are aware, mortgage servicing rights (MSR) deals are complex and impact nearly every area of the bank. While the records team doesn’t have the final say, your input is vital to understand the costs, requirements and timeframes associated with a pending transfer. You need to get the most out of your sale price and ensure the smoothest records transition possible, regardless of whether you are buying or selling.
Billions of dollars in mortgage servicing rights have already changed hands over the past few years. Some experts disagree on the exact amount that still may be “in play,” but it’s safe to say that the number could easily be in the trillions. With that amount on the table, it’s easy to see how records management could get lost as more and more financial institutions look to sell off their collection rights on mortgages while others look to increase market share.
The purpose of this article is not to shed light on significant advancements in the field of records and information management, but rather help highlight some of the most common and not so common records concerns that should be considered when transferring or acquiring a large MSR portfolio.
While inventory quality is always important, when it comes to transferring mortgage documents the quality of your inventory data is critical. A good place to start is to ask the same questions you probably ask about every record under your care: “Is the record properly indexed and can I get to it?”
Loan records are typically catalogued and stored as they come. It is therefore unlikely that all the loans associated with a transfer are filed together and immediately ready for delivery. Most likely, they are distributed across multiple locations, boxes or even media types. This also means that the loan files that are being sold today may be comingled with loans that need to stay. The speed with which you can compile and transfer a portfolio is therefore highly dependent on the quality of the data and how it is indexed (i.e. the record number, name, record type, location, etc…).
Another reason to get control over your inventory is that you may want to prioritize the transfer of certain loans. Many portfolios contain both delinquent and non-delinquent loans. As the new servicer, faced with a lengthy transition plan, you may need to access the delinquent loans immediately in order to make sure the necessary records are in order well before the default process may need to be initiated.
Similarly, the seller may need to delay, and therefore deprioritize, the transfer of loan files where there may be residual legal or audit inquiries that require resolution. Again, having a clean view of the records and where they are located will help speed and optimize the transfer process.
Estimating the cost to move the records is not a simple process. Many factors need to be weighed – what is being moved, what format should be transferred (physical vs. electronic), have you considered the trailing documents, etc. These questions will help uncover the most frequent hidden costs within the records transfer process.
The cost to transfer origination files can be fairly easy to estimate, and compared to the overall deal may appear to represent little to nothing at all. When you take into consideration that most origination documents have already been imaged, some institutions may be tempted to save time and money by transferring only the electronic records. This appears to be efficient because it reduces the upfront costs associated with retrieving the physical inventory, potentially transporting it to a new facility, and adding storage space.
However as the buyer, the danger in acquiring only the electronic content is that now you have no back-up. Given the variable imaging quality of mortgage files throughout the past 10-15 years, and all the legacy acquisitions that you may be inheriting, it is unclear if the electronic version of the records will be sufficient. Without the physical records you are operating without a net with no way to quickly and accurately supplement or validate the documentation that was transferred.
Moreover, as part of onboarding the new MSR portfolio, servicers compare loan data to loan documentation to validate that the loans purchased are the loans received. While some servicers may be comfortable doing this with electronic records, many consider it best practice to validate the critical loan data off of the physical “final documents” (e.g. recorded security instrument, assignments, etc.). This not only helps you confirm the data but also ensures that you have the necessary originals that may be required to process default, foreclosure, or even lien release.
Given the variable imaging quality of mortgage files throughout the past 10-15 years, and all the legacy acquisitions that you may be inheriting, it is unclear if the electronic version of the records will be sufficient.
Either way, industry best practice dictates that both physical and electronic files should be transferred in order to avoid further issues or hidden costs down the road.
In addition, another hidden cost is often found in the multitude of trailing documents that come in post-close after the origination file has been stored. In fact, trailing documents may be the most expensive part of the process. While from a total volume perspective, trailing documents may only add 6-8% in terms of pages, they may add more than 400% to your expected cost. How is that possible? It’s simple - while origination files average 250 pages each, typically only 8-10 files can be stored in a standard carton, making it easier for your team to track, find and retrieve. Trailing documents average only 5-10 pages and are often stored by like record type or by the date they were received. Depending on the type of data inventory you maintain, you may need to sift through hundreds of records in a box before finding the one trailing document you need to retrieve and transfer. What’s worse is that your most common “trailing documents” are “final documents” which must, in all cases, be transferred physically to the new servicer.
Balancing Cost and Speed
Always a delicate balance, cost and speed are constantly at odds. If given an unlimited budget most records managers would have already developed a lightning fast, accurate and compliant transition plan. But since cost is invariably an issue, making sure you meet the needs of the business now, while getting the records transferred as fast and as cost-effectively as possible, is the mandate.
Here are a few questions that should be considered when looking at the costs and timing of transferring an MSR portfolio:
-- Does your internal team or 3rd party vendor have the staff and expertise to compile your portfolio in an optimized fashion?
- Do you need to take experienced resources away from their daily responsibilities to compile the files needed for the transfer, or if you are using a storage vendor, can they compile the proper documents?
-- How long will it take to assemble trailing docs?
- Incorporating the trailing document transfer into the planning process will help determine cost and speed, identify which physical records are required, which should be moved immediately, and which you may choose to image over time.
-- Are the deadlines stipulated in the legal transaction realistic from an operations perspective?
- While the new servicer may take ownership of the MSRs on January 1st, is it reasonable to assume that all of the files can be transferred by that date? Have all parties considered all options and costs prior to agreeing to the document deadlines?
-- Who will pay?
- Many MSR deals define who will pay for the records transfer, but that may come with guardrails. Did the decision cover all potential costs and timing? It’s important to determine exactly which records need to transfer, what media is acceptable (may vary by document type), who will pay for the transfer, including the transportation of records if needed.
If you are the seller, this is a great opportunity to leverage the MSR transfer process to review the files that are staying put. When retrieving the files that you’ve sold, look at the files that remain, and determine if they are active loans. If not, move them into a destruction schedule. This will help you down the road as records destruction leads to reduced storage costs.
For the acquiring servicer, you’ve just gone through the process of validating the loan data and identifying the files that are high priority. You could now use the physical documents to confirm the quality of the electronic file. Furthermore, if your portfolio is not 100% electronic, you should determine what needs to be imaged immediately, perhaps due to a higher risk of default, or what you may choose to image over time
No one is suggesting that the records manager be the deciding factor for whether an institution buys or sells its mortgage servicing rights. But understanding how your loan file management practice works may impact the cost and success of your MSR transfer. It is an important piece to consider before, during and after the deal is done. Questions regarding who is paying and what is being transferred are just the start of a process that can take months to complete. By reviewing the potential issues, such as trailing documents, and developing a plan beforehand, companies can avoid some common headaches.
At Iron Mountain we have been working with financial institutions for more than 60 years. In fact, our first customer was a bank in 1951. While the times have certainly changed, our commitment to the financial services industry has not. As the industry leader in records and information management we have partnered with mortgage servicers to help them meet the needs of their customers, regulators and investors. Whether you are looking to buy or sell an MSR portfolio, or if you already have and now need to consolidate your existing records to create a streamlined process, we can assist you.