Mortgage Lending

1. © 2012 Cengage Learning

2. © 2012 Cengage Learning
© 2012 Cengage Learning
Residential Mortgage Lending:
Principles and Practices, 6e
Chapter 16
Mortgage Loan Servicing and Administration

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Objectives
• After completing this chapter, you should be able to:
– Explain why loan administration is so important to residential
mortgage lenders
– Describe the responsibilities of a loan servicer
– List the various functions performed by a loan administration
department
– Explain how the typical functions of loan administration are
performed
– Discuss the various ways that a department could be organized
– Explain how servicing income is generated
– Understand why a servicing portfolio has value

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Mortgage Payment Methods
• Coupons - provided in one-year supply; mortgagor submits one with each
payment. The coupon will have on it the loan number, due date and
payment amount (often this information can be encoded on the coupon
for rapid and efficient processing).
• Monthly billing – servicer mails a bill to the borrower each month. Its
main advantage is as a reminder that the payment is due, but the
drawback is the mailing cost. Cross-selling other services by including
advertising on the bill can offset this drawback.
• Regular USPS or express mail - The traditional manner in which the
borrower writes a check and sends it with either the coupon or bill.
Megaservicers use lock-box facilities to process the payments and apply to
the loan account. Smaller servicers open their own mail and process it
within the same servicing facility that the borrowers can visit for other
business (i.e., the main office).

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Mortgage Payment Methods
• Preauthorized automatic payment - Mortgage payment is
automatically deducted from the mortgagor’s depository account.
This method assures prompt payments on the due date. This is a
requirement for biweekly mortgages.
• Pay-by-phone - The borrower calls an 800 number and authorizes a
certain amount from a certain depository account. Funds are
transferred in batch processing from one institution to the other
and applied automatically to the loan account.
• Online payment - The borrower visits the servicer’s Web site, logs
into his secure account, and authorizes a certain amount from a
certain depository account. Funds are transferred in batch
processing from one institution to the other and applied
automatically to the loan account. Once online, the borrower can
access other loan data and even submit inquiries.

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Servicing Functions
• Payment Processing Department
• Loan Accounting Department
• Customer Service Department
• Escrow Administration Department
• Collection Department
• Real Estate Owned (REO) Department

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Causes of Mortgage Defaults
• Financial problems
• Loss of employment
• Layoff or strike
• Death of a wage earner
• Credit over-extension or bankruptcy
• Illness of a wage earner or mounting family medical expenses
• Loss of wage as a result of accident
• Marital problems
• Mortgage payment changes due to ARM rate/payment or escrow
payment increases
• Strategic foreclosures due to the borrower(s) losing all home equity

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What Do You Think?
• Discuss the difference between mortgage
loan servicing and mortgage loan
administration and how this difference
impacts the lender.
• Explain the benefits and drawbacks to a unit
vs. functional form of organization for a loan
servicing/administration department.

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What Do You Think?
• What are the various mortgage servicing
strategies implemented by lenders?
• List and explain mortgage servicing functions
and responsibilities.
• How do refinance waves affect servicing
departments (and lenders)?

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What Do You Think?
• How does a lender determine its cost of
servicing and why is this important?
• How are servicing fees calculated? When does
a servicer earn these fees?
• Explain the differences between servicing
retained, servicing released, and subservicing.

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Check Your Understanding
1. All residential mortgage loans require servicing.
2. The originating lender is not required to service a
mortgage loan, regardless of whether the particular
loan is sold to an investor or held in portfolio.
3. Servicing responsibilities end when the loan is closed.
4. Many lenders use the post-closing review as a type of
quality control.
5. A servicing contract establishes the servicing
relationship when a mortgage is sold to an investor and
the loan originator retains the servicing.

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Check Your Understanding
6. Default on a mortgage loan can only occur if the
monthly payment is missed.
7. The law requires a mortgage lender wait 30 days after a
payment was due before beginning collection
procedures.
8. A servicing release premium is paid to an acquiring
investor to service loans sold.
9. All residential mortgage loans require the monthly
collection of principle, interest and taxes.
10. Subservicing describes servicing done by a different
department within a lending institution.