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From Crisis to Crisis

The mortgage industry cannot get a break! There’s one crisis after another, each precipitated directly or indirectly by COVID-19 and the nation’s reaction to the pandemic.

In 2020, we had the refinance boom, fostered by a substantial reduction in interest rates. Industry loan volume doubled in a manner of weeks, creating a loan origination/processing crisis of immense proportions.

The manpower-intensive loan manufacturing process was not well positioned to handle that crisis. Lenders were forced to dramatically increase their underwriting manpower, a task that proved very expensive to do. In some cases, this task has proven impossible to do.

As a result, loan throughput stalled and loan quality plummeted. The frustrations of lending executives and potential borrowers grew exponentially.

Underwriter manpower was stretched to exhaustion and many newly minted underwriters were drafted into service, ill prepared for the challenges ahead. It requires thousands of man-hours of experience to learn to become a competent underwriter. It requires more than a bit of native talent to become exceptionally productive.

New underwriters, lacking the requisite knowledge and experience, had difficulty performing at a high productivity level, especially when loan quality requirements were high and staying that way.

As of 2020, the typical underwriter could accomplish an estimated 2.4 underwrites per day while adhering to loan-quality requirements. To meet 2020 volume, that statistic had to more than double with virtually no change in process or technology, or at least that was what the traditional thinking assumed.

A bottleneck emerged.

Many lenders had far more loans in the queue than current or future manpower could process, especially quickly.

A New Type of Crisis
In 2021, we will have what appears to be a much different kind of crisis. However, the 2021 crisis will be quite similar in cause to the 2020 crisis: the mortgage industry will simply not have sufficient underwriting manpower to execute on the volume.

Shortly, servicers must engage over two million borrowers who are exiting the COVID-19 sponsored forbearance plan and transitioning to a revitalized mortgage industry, where they will be expected to resume mortgage payments and pay past-due interest under a new set of mortgage terms.

Another bottleneck will emerge.

Soon, the mortgage servicing industry will be challenged to re-underwrite over two million loans, with virtually no surplus underwriting manpower to accomplish this volume.

As with the 2020 crisis, underwriting volume will far exceed capacity. There is simply no way the servicing industry has the underwriting manpower to cope with this huge influx of new underwrites. That’s more than two million of them.

That is a staggering number of underwrites.

Another consideration on top of these staggering statistics is that the CFPB is now monitoring the quality of servicing being offered to these homeowners.

To use the 2020 productivity statistic, this new volume will consume 791,000 person-days of underwriter processing time that will translate into 3,958 man-years of underwriting time and talent that simply does not exist in the servicing sector.

Attempts to transition underwriters currently being laid off in the origination space to the servicing sector will be slow and inefficient and unable to transition quickly enough to ease the pain.

Added to this stress will be the stress of adopting and executing a new set of underwriting guidelines, many of which have yet to be written. The secondary market will have to create new underwriting guidelines to guide servicers and borrowers through the many complexities of this new process.

There will also be additional challenges.

The Great Surprise
Not only must servicers process a re-underwrite with exceptional efficiency (one not likely to be possible), but they are likely to be engaging a borrower who is under substantial distress.

There is a shock awaiting the borrowers who are exiting the safety of the COVID-19 forbearance environment where all payments were suspended (but not forgiven).

They will be entering the new mortgage industry, where borrowers who have been in forbearance will not only be expected to resume mortgage payments but to repay thousands in delayed interest payments that were forborne but not forgiven.

This will be the Great Surprise.

This Great Surprise has not been anticipated by the average borrower, who will be shocked and may feel misled and manipulated. It is expected that such borrowers thought that they could simply resume their mortgage payments once COVID-19 had expired, unaware that they owed thousands in delayed interest payments.

Only the most financially astute have anticipated this reality. The financially astute players (who are in the distinct minority) understand the workings of the secondary market where mortgage interest is demanded and owed regardless of circumstance.

The COVID-19 forbearance plan simply did not relieve mortgage servicers and/or borrowers of their obligation to service mortgage interest during forbearance. This fact will cause the mortgage servicers to be re-engaging borrowers who will be surprised and feel misled by the request (demand) to pay past-due interest when resuming servicing their mortgage.

The net result may be 2.0+ million borrowers who emerge angry and frustrated by the mortgage industry directly and feel misled and manipulated by their government. Adding to this problem is the insult these borrowers will suffer by having to wait weeks, if not months, for their “new” mortgage loan to be underwritten.

Of course, the CFPB may emerge to add fuel to the fire, requiring servicers to move on with the two million underwrites at a speed not possible under current business models, which are highly manual in nature.

The situation in 2022 is ripe for new technology to provide the underwriting productivity and quality boost the industry needs.

That new technology must perform many dimensions of the underwrite automatically, performing the critical thinking underwriters must accomplish to underwrite a loan successfully and create a saleable loan with virtually no scratch-and-dent and/or repurchase risk.

More to Come
The lack of appropriate investor guidelines is an issue as well. This is an issue because each investor (i.e., each mortgage bond holder) will have to prescribe how the thousands of dollars in delayed but not forgiven interest expense per loan will be amortized in the re-underwritten loan. Whether the investor chooses to delay that repayment as an increase in monthly payments or as an increase in the unpaid principal balance has not, to my knowledge, been determined.

One more point, and it is a huge caveat: when human intel is relied upon to decide the fate of the “murky” loan, this is where bias and loan defects are introduced as humans attempt to make the data fit the desired outcome.

About Author: Thomas Showalter

Thomas Showalter is the Founder and CEO of Candor. He has held a variety of key executive experiences holding positions as CEO, C-level executive, SVP, and VP across a variety of nationally known firms: Digital Risk, CoreLogic, First American, Loan Performance, Experian, and several boutique data and analytics firms.

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