As the new year begins, we anticipate new opportunities to arise across the residential mortgage servicing marketplace. Economic factors such as rising inflation and shifting Federal Reserve policies have defined the past several years and will continue to shape the year ahead. However, technological innovation — especially the ongoing development of artificial intelligence (AI) — will soon take center stage as the key point of focus in defining industry’s competitive advantage. 

As with any year-to-year changes, shifting economic conditions and new technologies offer an array of opportunities for business leaders ready to seize the initiative, and pose risks for the unprepared. 

As a technology leader in mortgage servicing, PMSI is in a unique position to analyze the marketplace and help loan servicers navigate market shifts successfully. We have spent more than a decade developing a platform that is truly unique to the loan servicing ecosystem positioning us to help our clients take advantage of upcoming opportunities. 

Ups and Downs

Anyone who has spent time in the mortgage industry understands its cyclical behavior patterns.  As interest rates rise and fall, the industry responds with fluctuating credit cycles and origination cycles. But not all cycles look the same. For example, the current cycle is very unusual and unlike anything we’ve seen before. We just went through an extended origination cycle, but the corresponding credit cycle has yet to fully materialize. 

These changes are due in part to the many pandemic-related modifications that have impacted how these cycles would otherwise behave. The ultimate result is a drop in both involuntary prepayment curves as well as voluntary prepayment to take advantage of interest rates. This makes for a highly unusual period promising an anticipated $1.5 trillion origination cycle over the next several years.

For mortgage servicers, these ups and downs provide opportunities for those who have positioned themselves to capture and retain market share through competitive advantage driven by technology and data predictability.

Where We Are Going

So where does this mean the market is headed and what should business leaders look for in 2025? Cost-to-service increases as credit quality decreases. Whether the cycle is up or down, servicers who have not implemented technology and innovation will either lose market share or fail outright.

Servicers who have not implemented sufficient technology to offset their outdated manual processes will face more pressure than those who have adapted. Similarly, Servicers who have not taken the time to assess internal core competencies and identify partners to support the rest will also struggle.

Mortgage servicing leaders are understandably obsessed with short-term cost containment. But it would be a mistake to assume all costs driving the loan servicing industry right now are centered on value-creating functions. 

Compliance, risk management, and oversight functions account for a large portion of total cost to service. These are essential for servicing, but specifically for defense and stability. To thrive in this market, servicers must focus on a combination of offensive and defensive strategies. It may seem daunting, but loan servicers may need to cut defense spending to invest back into an assertive and proactive strategy focused on driving additional cash flow to the top line.

Mortgage servicing leaders must also continuously innovate alongside their origination partners to support expanded products all of which drive value to the MSR owners. New products that drive cash flow and retention strategies enabling MSR owners to maximize cash flows across multiple channels will separate the winners from the losers in 2025.

Risk and Reward

Even the most cautiously strategy minded partners must take risks in the market. Though their approach may vary between market cycles, MSR owners expect stability, transparency, and quality execution from their sub-servicers as a continuous core tenant of doing business.

There exists a shared necessity to achieve scale as a critical capability across all members of the mortgage ecosystem.  Servicers must achieve scalability while delivering consistent quality execution to survive in a competitive market. MSR owners and origination partners are equally focused on scale and the borrower experience to create and recapture loan volume across the same competitive market space.

Short-term cost containment to build scale is not a long-term winning strategy across any of these dimensions, especially for mortgage servicers. If continuous innovation and product quality improvement are not engrained in your operation, you will ultimately be earmarked for exiting the business.

Technology in 2025

The market has its ups and downs, but innovation only moves forward. Fluctuations in the market absolutely impact the technology adoption curve across the mortgage industry, and when it comes to technology, companies must either adapt or die. 

Cost considerations can lead to businesses becoming hyper focused on cutting short-term expenses while failing to make the necessary investment in new tools. The long-term gains in scalability and efficiency from adopting novel technologies is invaluable. Without a relentless pursuit of sustainable and scalable improvement, no organization can succeed in the long term. 

Successful organizations within the servicing industry understand they cannot afford to focus solely on short-term cost containment over the long-term benefits of quality performance. They will adopt or develop technology to enhance their operations in 2025, while others may choose to “squeeze a few more nickels” out of their existing process to manage costs. 

These latter organizations tend to focus exclusively on labor cost factors, without considering how technical investments in servicing operational processes streamline costs more through effectively automating and augmenting human delivered services.

Subject matter experts can guide technological development, but servicers should pick their battles and understand what they need their technology to do. Often, tools are partially implemented and never utilized to their highest use, thus not delivering the intended operational lift.  Organizations should motivate their teams to utilize all available technology to its fullest extent to drive value. A company’s technology choices should differentiate their product in the marketplace and enable users to deliver a stronger value proposition. 

Data Feeds AI

Ultimately, AI will be the single most watched technology in 2025 but that should not come at the expense of a committed focus to data quality. Too often in mortgage servicing, leaders get distracted with trying to incorporate new innovations and fail to fully address the underlying basics of the data these tools rely upon. Only a vigilant focus on pristine data (quality, consistent data in large quantities) ensures companies reap the benefits of AI and other information-driven technology tools. 

Quality data infrastructure is a must for any company seeking to effectively leverage AI, which requires vast amounts of information to feed its machine learning algorithms and arrive at consistent and accurate conclusions. Building a foundation based on years of transaction data can train machine learning with consistent and accurate information, laying the foundations for long-term accuracy.

Understand the Industry

Success in a competitive industry often requires filling a need nobody else is addressing. While mortgage servicing technology providers have developed robust loan servicing platforms, they are focused on end-to-end processing and do not thoroughly address the complex needs of each component of the loan life cycle – specifically investor reporting and accounting. 

There is an industry wide misalignment of investment made in critical operational functions specific to investor reporting and accounting.  As an operational function investor reporting and accounting equate to roughly 2% of the total direct cost structure of a servicer. At the same time, GSE partners Fannie Mae and Freddie Mac weigh this function at ~40% of their total scorecard performance ranking. This would imply many servicers are exposing themselves to increased performance risk due to lack of investment.  Retaining a partner who specializes in and has developed technology to uniquely deliver this 2% service makes a substantial difference. 

2025 will continue many of the trends of 2024 while offering its own unique challenges and chances to pull ahead. Understanding one’s own core competencies is critical to delivery success. Successful servicers understand where their internal capabilities exceed the market and leverage partners to fill the areas where they do not. 

Whether these areas are outsourced technology providers, accounting & reporting, collections, or other servicing operational functions, the key point is that success is derived by assembling the strongest team of experts across the delivery platform. There is little value in attempting to master every aspect of the servicing process when external expertise is available for specialized functions.

By applying the lessons of past mortgage cycles to each new cycle, prioritizing long-term growth over short-term cost containment, and supplementing in-house strengths with outside vendors to build the optimal mix of technology, scalability, specialization, quality, and innovation, Servicers can look forward to even more growth in 2025 and into 2026.