Editor’s note: This feature originally appeared in the February issue of DS News, out now.
Broad economic indicators suggest that the economy will begin to cool in 2019. The Mortgage Bankers Association’s annual forecast predicts that Real GDP is likely to fall by nearly one-third. Unemployment should remain low, but interest rates are expected to rise to 5 percent. Lenders are likely to struggle with building and maintaining origination volume, as well as keeping costs in check.
What will this mean for mortgage servicers? The good news is that economic growth should yield a continuation of the low delinquency rates we’ve experienced in recent years. Black Knight’s latest First Look report revealed that mortgage delinquencies fell another 18 percent in October (year-over-year). Fannie Mae and Freddie Mac both report that serious delinquencies (90 or more days past due) are below 1 percent. Additionally, wage growth topped 3 percent this year, and with home prices sky-high, this trend should continue in 2019. Exceptions will be regional: think GM plant closings, or areas hit particularly hard by tariff activity. For mortgage servicers, the challenge will be to maintain a palatable cost per loan in a shrinking margin environment, while also preparing for future market corrections by improving processes (particularly loss mitigation) and integrating technology to serve borrowers better.
BETTER DATA + BETTER TECHNOLOGY = BETTER DECISIONS
Lenders and servicers of all sizes and types are investing heavily in technology, and there is a hyper-focus on the issue of data—the quality of data, analytics, and its practical application. The next generation of successful companies will find ways to best leverage technology to make that data actionable. Spending millions on new
software or mountains of data is useless if it’s not utilized to the benefit of the company and its borrowers. Better data and better use of data not only improve current performance but also act as a hedge against future market corrections. But how do you get to that actionable data? In past years, working with a variety of technology/software vendors was a bit like trying to hammer a round peg into a square hole. You could make it happen, but the different systems never seemed to work or communicate smoothly or efficiently.
That’s all changed, however, with the advent and proliferation of API infrastructure, which has allowed tech partners to seamlessly weave two separate systems together with minimal hassle and with maximum effectiveness. Having systems work together allows servicers to collect quality, real-time data, help customers by better anticipating problems, and to spot and respond quickly to consumer trends. This is particularly helpful when it comes to loss mitigation. Those in the servicing space can learn quite a bit from the lessons and experiences of their colleagues on the origination side. They have been the trailblazers when it comes to building automated processes and seeing the benefits of systems that work together seamlessly.
For loss mitigation efforts, the ability to know that your borrower is headed down the path to delinquency in time to provide meaningful assistance is invaluable. That’s the future (and present) of loss mitigation—quicker, better decision making. Instead of waiting for a call from a borrower who is already in trouble, servicers can (in many cases) offer a modification that may end up allowing the borrower to avoid the entire default/foreclosure process (and save significant time/cost for all parties).
TECH AS A HEDGE?
From an operational perspective, having the ability to automate the collection, organization, and analysis of data, and tee it up for quick and accurate decision-making is a crucial hedge against market changes. It allows the company to more easily cross-train personnel and speed up the onboarding and training of new employees (particularly tech-savvy millennials). In the case of a sudden increase or decrease in volume, servicers can deftly move folks from one space to another, maximizing efficiency. Additionally, it’s a benefit to the employee to have a more well rounded working knowledge of the business, rather than being siloed in a niche that may not be needed next year. Additionally, by ensuring that data is highly accurate and organized in an easily accessible format, servicers have a head start on ensuring compliance within an ever-expanding web of regulatory rules and guidance from 50 state regulators, the Consumer Financial Protection Bureau, and other enforcement mechanisms.
THE POWER OF THE HUMAN TOUCH
While advances in technology have been a boon, the most successful loss mitigation teams are invariably those that understand the value of human contact. When examining a borrower’s reported hardship (think how hard it is even to verbalize that you can’t meet your mortgage obligation), it is crucial to listen to the borrower’s desires and work with them to accomplish their goal, whether it is to sell/liquidate the home or find a solution to stay in it. Further, the method by which servicers reach out to borrowers is critical. In 2019, servicers must have systems in place to contact borrowers in ways that will be successful. This is where technology and the human touch work well together. Knowing your success rate on phone calls, mail, email, or even text/social media is important, and the ability to spot trends and see where adjustments need to be made will yield success in finding solutions for borrowers.
RIGOROUS TESTING AND EXPERIENCE
There is value in testing both internal systems and teams to ensure that servicers are best prepared for both market-based and natural disasters. Both proactive and reactive testing is required to thoroughly assess readiness. Proactively, for instance, servicers can examine their processor teams and note how many accounts they are typically assigned. After the adoption of any new technology or process, servicers can push the processor by adding a few more accounts to see if they can handle the extra workload in the same amount of time, without sacrificing quality of service. Knowing in precise detail how effective your team members are will allow for an incremental increase in efficiency.
By doing more with less, companies can hedge against a market downturn. However, perhaps the best test comes in a reactive format. In just the past few years, servicers have faced countless natural disasters—fires, floods, hurricanes, and more. The knowledge, skill, and experience gained from working with genuinely distressed borrowers to find solutions will go to waste if there’s no “post-mortem” evaluation. Ask the tough questions: was the team overworked? Despite the chaos inherent in a natural disaster, did we still provide a high level of customer service? What did our outcomes look like? While some disasters aren’t predictable, those that are, provide the opportunity to begin the loss mitigation effort well in advance.
We are just on the leading edge of finding out how technology can positively impact mortgage servicing and loss mitigation. Keep your eye on how much faster and more accurate decision-making gets thanks to increased use of machine learning and API integrations between systems. This will benefit not only servicers but also borrowers. If you were in the midst of financial hardship, the last thing you want is a delay in the decision. You want a quick, accurate decision. From the company’s perspective, the ability to do all this in a scalable, efficient process could mean the difference between success or failure in a rising-rate, low-margin environment.
Speaking of rising rates, one additional trend to watch is potential changes from government agencies (FHA, VA, and USDA) and the GSEs, if we start to see an increase in defaults, particularly from borrowers who have received a modification in the last decade. Since that modification likely came with a low interest rate, loss mitigation efforts now will almost inevitably result in higher rates. Agencies will have to revisit loan modification programs and revamp program mechanisms such as term extension and principal forbearance/forgiveness to reduce monthly borrower payments. Despite all the change servicers face, we have to keep in mind that our mission remains the same—utilize both technology and human empathy to reduce mortgage losses by keeping families in their homes when possible.