Loan servicing is the process by which a mortgage bank or subservicing firm collects the timely payment of interest and principal from borrowers. The level of service varies depending on the type of loan and the terms negotiated between the firm and the investor seeking their services.
Mortgage servicing became "far more profitable during the housing boom", and servicers targeted borrowers "less likely to make timely payments" in order to collect more late fees.[1]
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Servicers are normally compensated by receiving a percentage of the unpaid balance on the loans they service. The fee rate can be anywhere from one to twenty five basis points depending on the size of the loan, whether it is secured by commercial or residential real estate, and the level of service required.
The net present value of the flow of payments received from servicing less the expected costs to servicers creates an asset which remains on the balance sheets of servicers. Since in refinancing periods loans are often quickly prepaid and hence servicing fees cease, the value of these assets is extremely volatile.
There are economical loan servicing products that can also be purchased.
Traditional Servicers
Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup are the largest companies involved in the loan servicing industry.[1]
Special Servicers
"The business of managing borrowers in or near default, a.k.a. special servicing, is dominated by Ocwen Financial of West Palm Beach, Fla. and Litton Loan Servicing of Houston, owned by Goldman Sachs. Traditional, bigger servicers—Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup handle 60% of all U.S. residential mortgage debt—can deal with sticky borrowers but are far from dexterous: They rely on large staffs, with up to 24 employees handling a single borrower from the initial call from a collections agent all the way to foreclosure." [2]
All major lenders automate the processing of their loan portfolios across their entire organizations with a product such as Benedict Group’s LOANS! For .Net software. Such systems facilitate every step of a loan’s life cycle from original application, approval and disbursement of funds, escrow processing, billing, payment processing, regulatory reporting, and eventual payoff or sale to other investors. In addition, they provide sophisticated tools for monitoring a loan’s status and modifying its terms as needed to minimize their risks.