The Value of Being a Mortgage Sub-Servicer

Why would a credit union ever choose to sell its jumbo-mortgage loans servicing-released and become the sub-servicer of those loans?




Why would a credit union ever choose to sell its jumbo-mortgage loans servicing-released and become the sub-servicer of those loans?

The reality is there are four major benefits in being a sub-servicer of your own loans. First is the credit union still can maintain direct control of the servicing relationship after it has sold the loan. The credit union can see what transpires during the servicing process and can keep its members informed or anticipate an unexpected situation. In addition, it can take advantage of cross-sell opportunities which result in revenue gains.

Second, a credit union receives a servicing-released premium. Because it sells the loan servicing-released, that means it gets a better price for the loan it sells. That in turn makes the credit union more competitive with other lenders in competing for the affluent jumbo market.

Third is the credit union receives payment for servicing the loan it once owned. This fixed fee generates an on-going cash flow that it can apply against its servicing costs.

And fourth, a credit union is able to keep from worrying about the volatility of a servicing asset. Managing a servicing asset requires a certain level of expertise to deal with several issues. Those issues include proper accounting treatment, hedging and regulatory issues. Being a sub-servicer, the credit union also avoids the issue of write- downs due to accelerated prepayments that cause the servicing asset to lose value. Now accounting treatments, hedging, regulatory issues, and write downs become someone else's concern.

So how does a credit union become a jumbo mortgage sub-servicer? Credit unions are given several servicing options by selling their jumbos to Network Liquidity Acceptance Company, LLC, NLAC (a corporate credit union network CUSO). The credit union sells the jumbo mortgage servicing-maintained. NLAC assigns the servicing for the mortgage to the credit union that sold the loan. To qualify as a sub-servicer, the credit union meets the base qualifications as required for a credit union to sell its jumbos servicing-retained, only without the annual jumbo-sales volume requirement.

NLAC also gives some options to credit unions with other servicing needs. A credit union can sell its jumbo loans servicing- maintained and receive customized brand name servicing. The servicing is transparent to the credit union's members who still see the credit union as the loan servicer. Another option is for the credit union to sell the jumbo loans servicing-retained. This option allows the credit union to remove the interest rate risk, but keep a servicing asset on its books. The credit union maintains a close relationship with the member under either option. That relationship is enhanced because NLAC does not cross-sell natural person members and works to ensure that each credit union continues to be the primary financial institution for its members.

A credit union can get the best of both worlds when it becomes a sub-servicer. It gains a servicing- maintained premium for selling the jumbo loans, and also is paid to service the loans. It's an interesting option to consider.

NLAC is a CUSO and wholly owned subsidiary of U.S. Central Credit Union. Jim can be reached at (888) 872-0440, ext. 6153.




Feb. 3, 2003



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