This piece originally appeared in the January 2023 edition of DS News magazine, online now.
This past spring, as the Federal Reserve began raising short-term interest rates, the housing market began to see the effects reflected in mortgage rates. In the week of May 12, according to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage was 5.3%, up 2.36% from the same week in 2021. Rates were also up 2.22% on 15-year fixed-rate mortgages, to 4.48%, while 5/1-year adjusted-rate mortgages had the lowest rate at 3.98% (up 1.39% from 2021). These increases can mean hundreds of dollars more in mortgage payments each month, stretching consumers’ abilities to get a needed refinance or to purchase a new home. Although the previous norm of interest rates hovering around 3% was historically quite low, the higher rates coincide with a housing market that is already struggling with record-low inventory and record-high home prices, as well as dealing with the lingering economic effects of the COVID-19 pandemic.
In this environment, the role of the mortgage servicer is becoming increasingly important, as servicers and their customers are likely to be together for longer as sales slow and refinances drop off. Mortgage servicing is central to many unique homeownership dynamics, and servicers need to have the tools, technology, and financial stability that will be necessary to handle their customers’ needs in any economic environment.
Crack Open the Toolbox
There are many reasons why a homeowner may be in forbearance with their mortgage servicer, but certainly, a significant number of consumers went into forbearance because of issues caused by the pandemic. The CARES Act allowed homeowners with a federally-backed loan to obtain up to 12 months of forbearance, and federal investors and insurers enabled servicers to offer longer periods of forbearance in certain circumstances.
Many of these forbearances are now coming to an end, but some homeowners still are struggling and are just now asking for assistance, even though many pandemic-related programs are currently set to expire in 2023. With interest rates moving higher, refinancing into a lower-rate mortgage may not be a viable option to help these consumers, so servicers must be able to use a variety of tools made available by investors and insurers to work with such borrowers.
Luckily for both servicers and the larger market, this doesn’t seem to be a replay of the issues that the market saw in 2008. Today’s borrowers had to go through a more rigorous loan qualification process, and, in addition, home values remain high, meaning there is very likely still equity in the property. However, although many loan modifications in the past provided customers with a lower interest rate to help make the loan more affordable, many homeowners might not see a benefit with a modification currently. Although a lower payment through modification may not be possible, servicers can use different methods to bring customers current, including taking them back out to a 360-month or 480-month amortization on the modification.
The tools available to the servicer will vary based on the type of loan, however. With government-backed loans, there is a prescribed regimen for servicers to follow, but some servicers may have a bit more flexibility in their options for non-governmental loans, depending on the value of the property and the investor backing the loans.
One of the simplest and yet most valuable tools to find in a servicer is customer service. Can a borrower pick up the phone and talk with an actual person? Can they get their questions answered in a thorough manner and receive helpful information about their account? There are a lot of options available to homeowners and servicers alike, from loan modifications to cash-out refinances, and the choices alone—let alone the financial difficulties—can often be overwhelming.
The Right Tech for the Time
Of course, not everyone wants to talk directly to a person or can call during specific hours. Some borrowers may just want to do some research into their options and the realities of their financial situation before talking with a servicer. Many servicing companies provide a variety of online options for homeowners to explore before acting.
Some servicers even created websites during the pandemic that allowed borrowers to see customized workouts that were specific to their situation—not just generalized scenarios.
Although technology is often touted as a differentiator, it can make a significant difference for borrowers and lenders. Some servicers offer borrowers the ability to look up how much their home is worth, as well as how much they currently owe. The technology extends further so the consumer can see payment information broken down into what is due each month, principal, interest, and how much is in escrow, allowing borrowers to have a better understanding not only of their financial situation but also of what is involved in their mortgage. Making more data available to borrowers keeps them engaged and informed and can help them become better long-term clients for everyone involved in the housing industry, including mortgage brokers, lenders, and servicers.
In addition to consumer-facing technology, servicers also need the right operational and technological tools to get their work done efficiently and expertly. Some servicers have advanced systems that allow them to track complaints or concerns expressed by borrowers. This not only allows for better customer service, as servicers can better track issues to their resolutions, but it also allows for the company to more readily take note of trends from consumers, prompting changes in workflow and policies where needed.
As the market continues to shift, it is becoming increasingly important for servicers to shift with it. With rising rates in this newfound environment, servicers are becoming ever more critical to homeowners and lenders alike. With the right technology and the right staff, servicers can offer the tools that homeowners need to stay in their homes, as well as provide the best options for lenders to maintain their investments.
Although there are numerous servicers currently working in the mortgage industry today, they vary greatly in the actual services they provide.
Some are merely the go-between for borrowers and lenders, while others are aligned directly with the lending company. There are advantages and disadvantages to these scenarios, but lenders that directly service their loans do offer a few distinct advantages to borrowers and the market overall.
Servicers that are part of the same umbrella company as the lender can offer continuity to the consumer. Instead of going through the process of acquiring a mortgage or refinance from one company and then being immediately handed off to another separate company, borrowers can stay with the company they already know, one that offers a multitude of benefits, including the simple ease of having the same account number and knowing where and when exactly to send a payment.
As the housing market continues to feel the effects of rising interest rates, the role of the servicer in the mortgage process will become increasingly important. With high home prices, low inventory, and higher interest rates combined with the lingering effects of the COVID-19 pandemic, it is likely that servicers will be working with borrowers for years to come to overcome the financial difficulties that many face. Servicers that have a wide variety of resources for borrowers at their disposal, as well as avenues with which to interact with those borrowers will be critical to keeping more satisfied customers, as well as enabling more lenders to be satisfied with the quality of their portfolio. Partnering with lenders with in-house servicing and strong technological tools can help everyone involved in the housing market to provide the best experience possible for borrowers.