It is ten thirty at night on Sunday and I am at the store. I have mentioned before that Sunday is a day I like to spend reading, studying and learning. Most of my day was preoccupied by other demands, but I am finally able to settle in for some study, and especially with an eye on the markets and tomorrow’s open. To that end, I have been looking at TZROP. I have been through their public report, and done some other reading, but still in learning mode.
Another topic I have touched on tonight is my favorite: mortgage banking. Readers will know, I have a dim view of loan servicing, especially as an asset to invest in, but also primarily because it is wholly unsupportable from the perspective of both mortgagor and investor. The actual task of receiving, applying, and remitting mortgage payments into a bond structure is so stupid simple that no customer would ever pay the mortgage servicing fee, if they ever knew they were paying it, and had a choice. That means, yup, the only ones benefiting are the servicers.
The Covid-19 pandemic has forced changes on servicers which bring their (lack of) utility into focus. These are basic changes of work-from-home, and customer self-service which 1) should have been made ten years ago, but for the problem that it 2) undermines the idea that the utility provided supports the amount paid by borrowers. As servicers move their teams to work from home, they will enjoy reductions in overhead costs at their facilities. Their decentralized workforce will demonstrate that the tasks of loan servicing can be largely crowdsourced, when human intelligence is required. Servicers are accelerating the already purposeful programs migrating customers to perform much of the work of servicing themselves, using self-service options online.
So, when will the servicing fee come down? When will we start to see some price wars with servicers trying to attract borrowers to their platforms with discounts and incentive? When will we see agents paying premiums and incentives to mortgagors in exchange for rights to transaction information about tax and insurance payments, or other personal information? When will borrowers be able to choose? My answer is: we will see things like this before your current MSR’s expected duration is up.
The drum beat I am pounding is that servicing is an anachronistic institution. One which we are doing out of habit, because the people paying don’t really know they are paying it, and because there is no real incentive for the servicing industry to innovate, except on cost of regulatory compliance. Because of this, it is structurally weak, and ready for a fall. For those who knock it over, there will be opportunity.
In other news, I will again recommend Peter McCormack’s four part docu-series about our current Treasury Secretary, Kip Mnuchin, which you can find on YouTube here:
Final thought:
Our hearts beating on
Gentle shores and crashing cliffs
Ocean’s timeless way