Residential subservicing through the pandemic

Residential mortgage servicing has evolved significantly since the 2008 financial crisis, including the transformation of the subservicing industry, which has become an integral part of the mortgage servicing process, providing full portfolio servicing for small and mid-size portfolio owners, and taking on the challenging delinquent and specialty product portfolios of some of the largest portfolio owners.  At the end of the first quarter of 2021, sub-servicers were processing approximately 30% of the residential mortgages by value, according to data collected by Inside Mortgage Finance.

The pandemic of 2020 demonstrated the challenges associate with this new model.

As noted in the July 30, 2020 J.D. Power 2020 U.S. Primary Mortgage Servicer Satisfaction StudySM, the combination of historically low interest rates, record high unemployment, and rising delinquencies created a surge of customer inquiries that were met with more website utilization, long wait times at call centers, and very little proactive communications – all of which dragged down overall customer satisfaction scores.  Some of the largest sub-servicers ranked below the industry average.

In our analysis, this is consistent with key characteristics of the sub-servicing model and illustrates the unique risks associated with the model that, during normal times, represent an operational advantage.  Specifically, the sub-servicing model presents two key competitive advantages during normal business conditions:

Lower cost:  high volume, a specialized, singular focus on mortgage servicing, and lean management allows most sub-servicers to offer competitive costs when compared to larger full-service institutions, that often have significant overhead costs and additional administrative costs associated with the full-service nature of their products and offerings, distributed footprint, and brand positioning.  This is also in part due to a lower regulatory burden.

Agility:  sub-servicers have traditionally demonstrated expertise at quickly adapting to changing industry demands, products, and market events through a combination of specialization, agile management techniques, and concentrated workforces.

The pandemic impacted key aspects of this model disproportionately, creating severe pressure on the foundational elements:

Concentrated workforce:  a key strengths of sub-servicers has historically been the geographically concentrated nature of their workforce, which allows for greater hands-on coaching, accelerated issue resolution, and lends itself to the now widely accepted benefits of an “agile” approach, which emphasizes the value of in-person collaboration, regular adjustments to processes and approaches, and specialized resources with broad knowledge of products and processes.  This model was severely challenged with the introduction of remote work, social distancing, and virtual collaboration.

Low expenses:  while larger institutions have been working with distributed workforces for years and have invested in the platforms and capabilities to facilitate this operating structure, the intense cost focus of the sub-servicing industry has often meant these types of technologies were rarely implemented on a large-scale basis.  When the pandemic struck, many institutions were forced to quickly expand their technical capabilities to support a distributed workforce, while at the same time experiencing the resource challenges associated with reduced hands-on oversight, and elevated expenses associated with rising delinquency rates.  Together, this pressured the overall financial position and ability to make the fundamental changes that were required in an expedited manner.  Large institutions experienced similar challenges, but were more likely to have sufficient workforce capacity or rapid access to third-parties that could be allocated to these special efforts.

The result was degraded service levels that proved costly to overall customer satisfaction.

Emerging from the pandemic and looking forward

This event exposed the strengths and weaknesses of the sub-servicing model and highlighted the importance of strong resilience planning efforts.  It also provides an opportunity to evaluate the strength of sub-servicing relationships, and make the appropriate adjustments to ensure long-term success.  There are four key areas that should be reviewed and considered:

Issue resolution:  everyone experienced severe challenges during this event.  An evaluation of the approach to resolving issues is paramount.  Was the approach collaborative or defensive?  Was there sufficient transparency through the resolution process?  Were the issues ultimately resolved?

Economic factors:  the business case for using a sub-servicing model often revolves around the ability to deliver a target level of service at an economically advantageous cost.  This event exposed the potential for costs, both to operationally supplement the sub-servicer and in customer experience, that may or may not have been factored into the original decision to implement a sub-servicing model.  The data are now available to accurately enumerate the impact and adjust the business case accordingly.

Operating model:  every market challenge exposes the strengths and weaknesses of an operating model – which is defined as the alignment of resources, processes, and technologies – and areas which performed well and those that should be adjusted to meet future challenges.  When looking at the sub-servicing operating model, there are significant variations across the industry, specifically as it relates to service level agreements and roles and responsibilities across different processes.  A review of the effectiveness of this model when stressed by external market conditions should be conducted to identify areas for adjustment or enhancement, which may include changes to the functions that remain outsourced and those that should be brought back in-house.

Effectiveness of penalty clauses:  while penalty clauses are often the last resort to issue resolution, they are also factors in the overall economic model.  This event has highlighted extreme conditions which may or may not have been adequately covered in the associated penalty clauses or sufficiently resolved.  A review of these clauses from both an effectiveness as well as practical perspective, is warranted.


The pandemic has created tremendous stress on an industry that has already undergone significant change over the past few years, and is likely to continue to experience pressures due to uncertain economic and regulatory factors.  It is important to regularly assess the effectiveness of the delivery model and partners supporting the process.  From a sub-servicer perspective, this is also an opportunity to collaborate with clients and reiterate a commitment to agility and quality.

We recommend that portfolio owners use this event to make an honest evaluation of their business and operating model, that includes sub-servicers, and engage collaboratively with their providers to position the delivery model for resilience and customer satisfaction in the future.  Similarly, sub-servicers should proactively engage with their clients to review the effects of the pandemic event, actions taken, root cause of issues, and ultimate results to establish actionable plans and reiterate the commitment to long-term shared success.  An immediate focus on expeditiously resolving any outstanding customer issues is critical and should be viewed as the shared responsibility of both entities.


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