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Rising to the Challenge

This piece originally appeared in the June 2022 edition of DS News magazine, online now.

The mortgage servicing industry, and related satellite sectors such as property preservation providers, have navigated enormous challenges over the past two years, with headwinds both global and particular to the business of mortgage. But even amidst the unpredictable eddies of a global health crisis, the industry has continued facing the rising waters, both literal and metaphorical, of waves of increasingly common, and increasingly damaging, climate-related natural disasters.

Hurricanes buffer coastal areas, causing both wind damage and widespread flooding. Drought continues to linger throughout many parts of the nation, with wildfires becoming an increasingly familiar presence throughout the west and southwest portions of the country.

CoreLogic’s 2021 Climate Change Catastrophe Report reported that more than 14.5 million single- and multi-family homes were impacted by the largest natural catastrophe events of 2021, with an estimated $56.92 billion in property damage. The Catastrophe Report further detailed that over 14.5 million homes were impacted by hurricanes, wildfires, winter storms, or severe weather in 2021.

According to data from the National Centers for Environmental Information and National Oceanic and Atmospheric Administration (NOAA): “In 2021, there were 20 weather/climate disaster events with losses exceeding $1 billion each to affect the United States. These events included 1 drought event, 2 flooding events, 11 severe storm events, 4 tropical cyclone events, 1 wildfire event, and 1 winter storm event. Overall, these events resulted in the deaths of 724 people and had significant economic effects on the areas impacted. The 1980-2021 annual average is 7.7 events (CPI-adjusted); the annual average for the most recent 5 years (2017–2021) is 17.8 events (CPI-adjusted).”

According to May data from First Street Foundation’s Wildfire Model, there are nearly 20 million properties that face "Moderate" risk of wildfire (up to a 6% chance of experiencing a wildfire over 30 years). NOAA data notes that the financial toll associated with wildfires has grown substantially, especially over the last half-decade, with $81.7 billion or 66% of all direct losses since 1980, occurring over the last five years.

With FHFA Director Sandra Thompson having stated that “climate change poses a serious threat to the U.S. housing finance system,” there’s no question that climate-related disasters remain a stark and expanding challenge that the mortgage and housing industries must navigate in the decades to come. With that in mind, DS News has once again checked in with some of the industry's subject matter experts on the topic to learn how the organizations dealing with the frontline fallout are tackling the difficulties and planning for the future.

Henriette Fleischmann
Co-Founder, Hosta AI

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
All homes with a mortgage have insurance. Making sure that in the event of a disaster, such as a flood or fire, the homeowner can respond quickly and file a claim easily is important. We developed Hosta AI to allow the homeowner to capture images that help assess the damage and process the claim. The idea of getting the homeowner back into the home and return to actively paying the mortgage is essential. The faster the homeowner returns to the home and some sense of normalcy, the less likely the mortgage will default after a disaster. Automate as many processes as possible to work on disaster recovery, provide fast service to people in need, and be cost-effective while providing superior services.

What lessons have come out of COVID-19 that can be applied to natural disaster response and assisting impacted homeowners through those challenges?
Technology that is hands-off and less intrusive, that doesn’t require face-to-face visits, is increasing in popularity. We launched Hosta AI in 2020, during the pandemic. The fact that our technology does not require a visit from an insurance claims representative is a big part of our value proposition. If the homeowner can file the insurance claim with minimal hassle, more claims can be filed quickly and efficiently.

Remote services were strongly on the rise during COVID-19. It created a shift in the industry, strongly driven by customers. That enabled a change that was previously considered to be years away in the industry. A huge opportunity to streamline processes, create superior user experience, and leverage a workforce that is just not big enough in cases of disasters.

How can technology best be leveraged to help predict, address, and solve these problems?
Artificial intelligence (AI) is becoming more mainstream every day. Technology can be helpful to the consumer and should be leveraged to improve the user experience. Large amounts of data can be harnessed to deliver answers quickly. AI allows us to process mountains of information quickly. If embraced and used properly, various forms of AI can save time and money to execute insurance claims after a natural disaster strikes.

There's a huge opportunity to predict the impact of disasters through existing data—weather forecasts, policy data, aerial images, etc.—and then create rules engines based on those forecasts. For example, when smaller losses are predicted as an outcome of a weather event, Hosta AI can automatically create a link for a policy holder to capture the loss, enable an estimate within a day, and enable the policy holder to get their repair managed in no time.

Louis Harman
Director, Property Preservation and Loss Drafts, Carrington Mortgage Services, LLC

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
You need to ingest FEMA declarations as they occur, identify Presidentially Declared Major Disaster Areas (PDMDAs) offering individual assistance—versus other types of declarations and programs—and then verify your exposure.

What lessons have come out of COVID-19 that can be applied to natural disaster response and assisting impacted homeowners through those challenges?
Tracking natural disasters independent from COVID-19 runs cleaner. Both scenarios can result in a forbearance, and each forbearance can have its own end-date. So, it’s a cleaner output to track each event and associated end-date independently. For example, declaration protections tend to expire in 90 days, whereas forbearances tend to carry out for much longer periods. Don’t conflate the data.

What are some ways climate change is impacting the industry and the way it must do business in the decades to come
Recognizing that PDMDA tracking occurs daily, year-round, and the influence is interdepartmental. Plumb your process to capture each PDMDA lifecycle, triggering communications to customers and mechanisms that identity when customers opt-out of protections, then opt back-in, versus those that remain silent.

How can technology best be leveraged to help predict, address, and solve these problems?
Technology is the basis to plumb and manage the entire process to capture multiple lifecycles running concurrent at different intervals. Separately, we use tech to assess our national exposure, as well as to identify hot spots where patterns reveal themselves.

Are there any other important aspects of natural disaster/climate change response that you think should be on the industry's radar right now?
It’s critical to understand that PDMDA tracking is a daily process that remains active throughout the year. Don’t wait for a PDMDA to occur and expect to react. You need a disciplined process in place with one owner, with rules defined at each entrance, and with established controls to ensure intersecting departments are doing what they should be doing. If you’re doing all that, then you will always be ready.

Laura MacIntyre
President, DIMONT

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
One of the most critical components of preparing for the increasing damage related to natural disaster is to ensure that homes are properly insured. We are seeing increasing cases where homes are not insured, underinsured, or have clauses excluding specific damages related to natural disasters.

These situations are leaving the borrowers, mortgage companies, and investors at risk of losing the equity in the property. It is critical to review policy exemptions and certain exclusions to protect against future losses. As the mortgage industry is entering unchartered territory, it will be critical for the mortgage community to be on top of their portfolios in order to preserve and protect against any blight in their communities.

What lessons have come out of COVID-19 that can be applied to natural disaster response and assisting impacted homeowners through those challenges?
No one could have predicted COVID-19. However, as we are rounding the corner and nearing the end of COVID-19, we have learned that people are resilient, and they have found ways to be resourceful. The mortgage community responded by being flexible with borrowers when experiencing damage or loss to their home and the communities partnered with local and federal agencies to ensure borrowers were able to get their homes repaired or appropriate measures were taken to ensure borrowers were not displaced. As we dealt with social distancing, vendors had to get creative to ensure properties were being inspected and safety precautions were being adhered to. The use of new technologies, including drone and AI solutions, were quickly implemented, which aided in helping borrowers and the mortgage community stay close to understanding the conditions of properties.

What are some ways climate change is impacting the industry and the way it must do business in the decades to come?
Climate change is putting more homes at risk of natural disasters, specifically flooding. We are seeing more flood damage in areas that had not previously been designated as flood zones. Since they are not flood zones, flood insurance is not required, and neither the borrower nor the servicer are prepared to handle damage related to rising waters. More education and communication relating to natural disasters needs to be at the forefront of our government so that our communities are prepared for whatever comes their way.

How can technology best be leveraged to help predict, address, and solve these problems?
Improved topology mapping, forecasting, and AI and drone technologies can be used to improve the predictions of homes that may be impacted by rising water associated with climate change, resulting in better information for our mortgage community to ensure the appropriate insurance has been placed on the home.

Are there any other important aspects of natural disaster/climate change response that you think should be on the industry's radar right now?
Given where our country is relating to inflation, gas prices, and the crisis impacting our supply chain (specifically materials and lumber), we will see a slowdown in properties being repaired and possibly issues relating to access to supplies which may cause further delays. The mortgage community and our entire industry should recognize that, ultimately, these issues may have an impact on housing prices and housing supply as properties may take longer to repair, which will have an overall impact on our housing market.

Jerry Mavellia
CEO, Guardian Asset Management

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
The frequency and size of recent disasters have been unprecedented and, thus, the proper level of coordination must happen quickly and decisively. Past disaster responses have provided a great learning opportunity to be better prepared for when the next disaster strikes. Preparedness should include efforts to assist both homeowners and servicers.

Communication and collaboration between the servicers and investors, visits to the disaster areas, and the suspension of foreclosures will help minimize losses to all involved. This can be critical during recovery efforts, and thus servicers are encouraged to monitor all communications through accurate and timely documentation in their systems. To that end, best practices for servicers must include a disaster response policy and procedures with documentation of all communications with the borrowers to support compliance with fair servicing requirements.

Jon Maynell Jr.
President, Advanced Data Corporation

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
We need to understand and plan for the short- and long-term consequences to help as many affected homeowners as possible. For example, how will property values change over time in affected areas? We’re not just concerned with how this will impact verification and underwriting for mortgages on these properties, but also with how we can best cultivate the most likely migration target areas.

What lessons have come out of COVID-19 that can be applied to natural disaster response and assisting impacted homeowners through those challenges?
People, more than ever, are looking to their homes as something that provides peace of mind. We, as an industry, need to be prepared to do whatever it takes, collectively, to help anyone impacted by global pandemic and/or global warming-related events. We saw the industry take some of the strongest measures ever to help borrowers retain ownership of their homes during the COVID-19 recession, which I believe is emblematic of how we’d respond to any other challenges of this type that occur going forward.

What are some ways climate change is impacting the industry and the way it must do business in the decades to come
Cultivating new or refining insurance products to ensure a swift response to natural disasters is certainly at or near the top. We need to be mindful of the fact that homeowners are much more mobile than ever before given the much higher incidence of remote workers in the post-COVID-19 era.

Also, affected areas will likely see the need for expanded financing to cover preemptive protection for their properties, such as hurricane shutters or water conservation equipment, which very well may present new verification and underwriting challenges.

How can technology best be leveraged to help predict, address, and solve these problems?
With technology, we can deal with all these problems efficiently and get homeowners the solutions they require quickly. This will increase loan complexity, adding additional underwriting steps.

Mortgage loans generally become more complex over time, making the use of automation more important to control costs and prevent increases in cycle time.

Are there any other important aspects of natural disaster/climate change response that you think should be on the industry's radar right now?
The fact that it is getting increased attention is encouraging, but we cannot lose sight of the idea that our measures must be preventive, not reactive. It’s a matter of doing what’s necessary to understand all potential outcomes and consequences, in order to make provisions for as many eventualities as possible.

Ryan McGuinness
Director, Mortgage Servicing Policy, Single-Family Servicing, Freddie Mac

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
It is important to develop and maintain a strong disaster playbook, including:

  • Readily available special policies and programs to address the needs of impacted borrowers
  • Educational resources to help borrowers to understand their options
  • Organizational processes for monitoring and assessing existing policies and to determine if/when additional communication is needed
  • Transparency with borrowers and the industry, including collaboration with other industry participants for both concept collaboration and external education on disaster program parameters

What lessons have come out of COVID-19 that can be applied to natural disaster response and assisting impacted homeowners through those challenges?
Freddie Mac’s initial response to provide assistance for COVID-19 hardships was to leverage existing disaster solutions to the extent possible in order to provide assurance immediately that solutions are available. Adjustments were then made as necessary to account for the specific challenges presented by the pandemic. Probably the key solution that was developed to help borrowers withstand COVID-19-related hardships was the COVID-19 Payment Deferral, which has been very successful in reinstating loans for borrowers who became delinquent as a result of the pandemic but were able to resume their normal monthly payments with the help of forbearance.

As a result of that success, we were able to adjust the COVID-19 Payment Deferral to create the new Disaster Payment Deferral. Interestingly, disaster policy helped to inform how we began to respond to the pandemic, and later as we worked through the crisis, pandemic policy would quickly return the favor and strengthen our disaster playbook even further.

Chad Mosley
President, MCS

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
Servicers and their vendors should have a plan in place before a disastrous event impacts a community. This includes plans for customer outreach, incoming customer service inquiries, vendor availability, access to properties, managing an increase in loss draft inspections, etc. Technology is also a valuable tool to identify the areas that are more severely impacted. It will allow servicers to place extra focus on those borrowers and properties in the severely impacted areas.

Are there any other important aspects of natural disaster/climate change response that you think should be on the industry's radar right now?
Perspective and preparation are key. As the adage goes, you must hope for the best and prepare for the worst. It is not acceptable to view operations from an “if” a natural disaster will occur point of view, but rather, you need to manage operations knowing a natural disaster “will” occur and will disrupt normal business activities.

Todd Pawlinski
VP, Mortgage Operations Manager, US Bank

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
Plan ahead. It’s easy to become complacent during an inactive disaster cycle. Develop a disaster playbook within your organization and ensure everyone knows their role in executing a response.

What lessons have come out of COVID-19 that can be applied to natural disaster response and assisting impacted homeowners through those challenges?
You must be agile as an organization and able to pivot in response to regulatory and process changes while keeping the customer in the forefront. Also, ensure you partner with your change management organization in an effort to track and implement necessary procedural changes that impact your business line.

What are some ways climate change is impacting the industry and the way it must do business in the decades to come?
As disasters vary from season to season, the industry must ensure it has the appropriate response and expectations for the execution of a disaster plan. During the California wildfires, we learned that typical SLAs around inspection completion timeframes were unrealistic due to restricted access issues to affected areas. Ensure you partner with your vendor network to obtain boots on the ground intelligence and set realistic inspection turn-time goals. Delaying your disaster response until access is allowed may be the preferred option.

How can technology best be leveraged to help predict, address, and solve these problems?
Many advancements in technology have entered the marketplace over the last decade. The ability to geo-map disaster impacted areas down to the street level has given the industry the ability to be more strategic to a disaster response.

Are there any other important aspects of natural disaster/climate change response that you think should be on the industry's radar right now?
We need continue to closely monitor the state of the economy and the supply chain. Should we have a series of natural disasters like we did in the fall of 2017, obtaining building materials to adequately respond to a natural disaster could be problematic.

Elizabeth Squires
AVP, Client Account Management, Safeguard Properties

What are the most critical components of how the mortgage industry should prepare to respond to the waves of increasing, and increasingly damaging, natural disasters?
The industry has done a tremendous job of understanding the impact of natural disasters and developing playbooks to address each type. The most important thing to understand is the individuals that do the work (inspections, preservation) are also directly impacted by the disaster. To effectively gather information and deal with the impact of events, contractors and vendors must be brought from other areas or travel into the impacted zone. This requires accommodations, travel costs, and the ability to deploy the knowledge of local realities to the visiting vendors.

What lessons have come out of COVID-19 that can be applied to natural disaster response and assisting impacted homeowners through those challenges?
Primarily, we learned that our contractor base is extraordinarily flexible and dedicated. We survived the impact of the pandemic and also worked within the hundreds of local constraints and frameworks that were created and put into place, seemingly overnight, to keep people safe. Community blight doesn’t go away just because we are in a lockdown; we need to ensure we find safe ways for vendors and contractors to do their work.

What are some ways climate change is impacting the industry and the way it must do business in the decades to come?
Generally, there are more disasters and extreme weather events than in recent memory. Droughts in the western United States have caused wildfires to become more common than ever before. The challenge with a fire is that the impact (similar to a tornado) can be very inconsistent in a given area. It is critical to get inspector boots on the ground quickly so we can triage the homes that need the most help.

How can technology best be leveraged to help predict, address, and solve these problems?
Technology can be unreliable to predict areas of impact prior to a disaster. We use the tracking models provided to prepare our network, including out of area vendors, but in the end, we only know the true impact once the disaster hits. Technology is best used to have a rapid response to actual, not theoretical, conditions on the ground. Communicating quickly to the appropriate decision-makers when every hour and day is critical to reducing damages can be extremely impactful.

Are there any other important aspects of natural disaster/climate change response that you think should be on the industry's radar right now?
Each servicer, GSE, and investor have their own view of best practices, so getting to a more consistent approach where you have allowables based on conditions is the biggest opportunity we have. Eliminate the “bid and wait” cycle and ensure that we utilize the boots-on-the-ground time most effectively when we have an impacted area.

About Author: David Wharton

David Wharton, Editor-in-Chief at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has nearly 20 years' experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. He can be reached at David.Wharton@thefivestar.com.
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