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© Cengage Learning 1
CHAPTER 16
MORTGAGE LOAN SERVICING
AND ADMINISTRATION
OBJECTIVES OF CHAPTER
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
© Cengage Learning 2
I. Introduction
II. Loan Servicing vs. Loan Administration
A. Organization of a Mortgage-Servicing
Department
III. Servicing Responsibilities and Functions
A. Setting up the Loan File
B. Post-Closing Review
C. Welcoming Letter
D. Mortgage Payment Methods
E. Servicing Functions
F. Servicing Contract
IV. Managing Delinquencies and Foreclosures
A. Mortgagee Options
B. Reasons for Default
C. Collection Procedures
D. Telephone Contact
E. Two Months Delinquent
F. Curing Delinquencies
V. Loss Mitigation
VI. Portfolio Management and Loan Administration
A. Evolution of Loan Servicing
B. Mortgage Servicing Abuses
C. FASB Rules
D. Servicing Strategies
E. Servicing: The Reason Some Lenders Are in
Residential Lending
F. Servicing Income
G. Servicing Profitability
H. A Profitability Squeeze with Each Refinancing
Wave
I. Other Income
J. Escrow Administration
1. Use of Escrow Funds
2. Limits on Escrows
K. Cost of Servicing
L. Purchasing Servicing
M. Selling Servicing
VII. Alternatives to Servicing Residential Mortgage
Loans
A. Servicing Released
B. Subservicing
Teaching Tips
What is the difference between loan servicing and loan
administration?
In what two ways are most servicing departments
organized?
Discuss the different risks unique to the lender and to the
servicer.
What is investor reporting and what does it do?
Should the servicer have an enhanced quality control
system to review a mortgage pool prior to purchasing the
servicing?
What problems did mortgage servicers and borrowers
experience in the past ten years?
Do you think that the government should have a bigger
hand in regulating the servicing end of the mortgage
industry?
© Cengage Learning 3
SUGGESTED TRUE/FALSE QUIZ
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 lender retains the servicing.
6. Default on a mortgage loan can only occur if the monthly payment is
missed.
7. Federal law requires a mortgage lender wait 30 days after a payment
is due before beginning collection procedures.
8. A servicing released 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.
© Cengage Learning 4
10. Subservicing describes servicing done by a different department
within a lending institution.
MULTIPLE CHOICE QUESTIONS. More than one answer may be correct –
select all correct answers. (Correct answers are italicized.)
1. Which of the below is not a type of mortgage servicing
a. retained
2. What of the following is NOT a responsibility of the loan servicer?
a. pay the homeowner’s insurance
3. How is the price of the servicing portfolio determined?
a. by the average loan size
© Cengage Learning 5
4. When the serving of a loan is sold, the mortgagee must receive notice
within
a. two months
5. A subservicer
a. works in the basement
SUGGESTED SHORT ESSAY QUESTIONS
1. Discuss the difference between mortgage loan servicing and mortgage loan
administration and how this difference impacts the lender.
ANSWER: Servicing includes the responsibilities, functions, and day-to-
day operations an organization performs over the term or repayment of that
© Cengage Learning 6
2. Explain the benefits and drawbacks to a unit vs. functional form of organization
for a loan servicing/administration department.
ANSWER: The function system assigns each employee to a specific
servicing function, such as real estate taxes, payments, or assumptions. This
3. What are the various mortgage servicing strategies implemented by lenders?
ANSWER: Several options exist. A lender that sells a loan to an investor
may also sell the servicing of that loan to another entity. Some originators
(usually mortgage bankers and brokers) sell the loan and servicing before it
4. Describe the different mortgage servicing functions and responsibilities.
© Cengage Learning 7
ANSWER: Payment Processing Department has the daily responsibility
of applying all payments received and balancing the accounts. Loan
5. How do refinance waves affect servicing departments (and lenders)?
ANSWER: A “refinance wave” is when a record number of borrowers
refinanced at the same time. The effect was devastating to many servicers
who see their portfolios evaporate in just a few months. So many borrowers
6. How would a lender determine its cost of servicing and why is this important?
ANSWER: It is generally assumed that in today’s market a mortgage lender
must be servicing about $50 million of loans sold to an investor servicing
© Cengage Learning 8
retained before the cost of servicing those loans is offset by the servicing
income. The reason the cost has come down over the years is the increased
7. Explain the differences between servicing retained, servicing released, and
subservicing.
ANSWER: Servicing retained is where the original lender that granted and
sold the mortgage continues to collect payment from the borrower and
distribute the appropriate funds to the investor(s) accordingly. The lender
© Cengage Learning 9
8. Describe and discuss the different options a mortgagee has in the event of a
default. When would different options be used and why?
ANSWER: The term “loss mitigation” applies to the process by which the
lender (mortgagee) attempts to collect on a debt that is in default. In this
approach the lender looks beyond the legal rights granted in the note and
security instrument to minimize the loss to both parties involved.
In the past ten years lenders place more emphasis on workout scenarios,
where the borrower and lender agree to modify the terms of repayment over
ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for oral
discussion in class. Suggested answers/points to emphasize for the
questions are found below.
© Cengage Learning 10
1. The activities in mortgage loan administration accomplish three
things. Name them and explain how they are carried out.
ANSWER: Mortgage loan administration performs the required
service to the mortgagor, protects the security of the mortgagee, and
2. How are servicing fees computed? By what other means may a
servicer earn income?
ANSWER: The servicing contract specifies the percentage to be
retained by the servicer. It is usually a fraction of one percent of the
3. Assume a new residential mortgage lender does not have a sufficiently
large servicing portfolio in order to perform the servicing function
profitably, what would you advise that company?
ANSWER: Since the cost of loan servicing is directly tied to the
volume of loans serviced, a lender often begins the servicing function
© Cengage Learning 11
