Making Money as a Mortgage Servicer
Posted by CM on September 4, 2009
By Coleen Martinez
On August 5th, 2009, the Associated Press published an article about lawsuits against mortgage servicers1. Here are a few key quotes from that article, “Servicers earn a quarter to a half percent on the value of the loans they service.” And “servicers also make money through late fees and/or foreclosing.” Well, this is how they make their money.
- PHH Mortgage pays $1 million to Bank of America for the right to service a loan portfolio of 1,000 loans with a total balance of $100 million.
- The portfolio has an estimated average life of 7 years.
- The servicing fee on the $100 million is .25%, which generates income of $250,000 a year.
- It only costs PHH Mortgage $50 a year to service each loan, or $50,000 in total.
- PHH’s net income is $200,000 a year for 7 years or $1.4 million.
- Therefore, after 7 years, PHH Mortgage has recouped their original investment of $1 million and made a $400,000 profit.
Hypothetical example continued with late charges:
- The rate of return on investment is 9.2% before late charges.
- If a late charge of 5% of the payment is collected from just 1% of the borrowers, the rate of return on the investment goes from 9.2% to 10%.
- If late charges can be collected from 5% of the borrowers, the rate of return exceeds 12%.
Both examples were written close to verbatim from Maureen McGrath’s testimony to the U.S. House of Representatives. (I added PHH Mortgage and Bank of America, Ms. McGrath’s testimony stated “firms” instead of actual companies. I also added the $1.4 million net income and $400,000 profit so you would not have to get your calculators out!)
Ms. McGrath was kind enough to alert me to her testimony and send me a copy. Click here for her full testimony. Maureen McGrath is the founder of the National Advocacy Against Mortgage Servicing Fraud. She testified before Congress in 2004.
1. AP IMPACT: Government Mortgage Partners Sued for Abuses. Daniel Wagner. AP. 8/5/09.
2. Testimony of Maureen McGrath on behalf of National Advocacy Against Mortgage Servicing Fraud. Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. United States House of Representatives. Field Hearing on “Broken Dreams in the Poconos: The Response of the Secondary Markets and Implications for Federal Legislation.” 6/14/04.