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Charting a Course

2021 was, in many ways, a year of transition, and in some ways a year of waiting for that transition to truly take hold. The mortgage servicing industry rose to the challenge of adapting to remote or hybrid work models while also assisting millions of struggling homeowners weather the unexpected storms of 2020.

This year, much of the focus was on preparing to continue assisting those borrowers as their forbearance exits approached and many would need guidance through a process many of them didn’t even know existed a few years ago, much less how to navigate.

With 2022 now on the horizon, DS News took the time to speak with a cross-section of industry subject-matter experts to get their thoughts about the year that has been and learn what they’re anticipating for the year ahead of us.

Stemming the Tide
The highlight of 2021, according to Rick Sharga, EVP at RealtyTrac, “was the unbelievably stellar job that the mortgage servicing industry has done working with the government to prevent literally millions of unnecessary foreclosures from happening—foreclosures that would not have been at risk of happening, had it not been for the COVID-19 pandemic.”

Steve Schachter, EVP, Market Leader and Head of Mortgage for Sourcepoint, echoed Sharga’s praise for how the industry had adapted and assisted in 2021. “They accomplished their goal, which was to keep people in their homes during one of the most unprecedented times in the country’s history. They allowed smart policy to prevail so that servicers could use their partners and their people to adequately communicate with borrowers.”

The CARES Act provided mortgage holders with several tools to help assist struggling homeowners and minimize that potential “wave of foreclosures,” including forbearance programs and moratoria on both foreclosures and evictions. But Tim Rood, Head of Government and Industry Relations for SitusAMC, also noted that the servicing side of the industry benefitted enormously from the fact that the originations sector continued booming despite the health and economic crises the world was pushing through over the past 18 months.

“It was the cash flow from the record origination volume and margins that largely underwrote the federal policies that allowed independent mortgage bankers to make the billions of dollars in servicing advances that they were required to make in support of the mortgage forbearance provisions and policies,” Rood said.

Sharga continued, noting that “What we’ve had over the past 18 months is just an unbelievably strong job by the default servicing industry of managing through those programs, in what has to be considered one of the most successful joint efforts the industry has ever participated in with the government.”

“For servicing businesses to survive the shutdown of the foreclosure industry is a success in and of itself,” Sharga added. It was a transformational year for the industry, according to Jane Mason, CEO of Clarifire. “In 2020, people were just trying to survive. In 2021, people understood the changes and started embracing them. We needed to transform our way of thinking into a new way. And we did that.”

Souren Sarkar, CEO and Co-Founder of the Nexval Group, described 2021 as the year that the industry matured and evolved its business model in response to extraordinary stressors. “In 2020, when the pandemic hit, it was just chaos.” The use of remote workers was new to most, but that was a reality most had adapted to by the start of 2021. According to Sarkar, Nexval—which offers variable capacity services designed to help mortgage servicers to scale up and down as volume dictates—“saw a tremendous increase in our uninsured servicing, title business, and property reports.”

Not a Rerun of 2008
Sharga credited some of the industry’s success in 2021 to knowledge gained during the previous challenges the industry has dealt with, particularly the Great Recession. This time, the default servicing industry and mortgage note holders were able to forestall a majority of issues ahead of time, rather than trying to resolve those issues after borrowers were already in default. “That’s much more difficult to do,” Sharga noted.

Other distressed borrowers during the previous crisis may not have been in default, but may have had negative equity in their properties. Due largely to fast-rising home prices over the past few years, negative equity is rarely an issue now—a factor which will help prevent a flood of foreclosures and then real estate owned (REO) properties hitting the market. A surge in REO could assist some segments of the industry that continue struggling, but that influx would also mean more foreclosures are happening, which is something the industry has been working to prevent over the past year.

Servicers were also aided by a strong underlying economy and historically low interest rates and unemployment, factors that weren’t present during the Great Recession, said Sharga, who also credited the Consumer Protection Finance Bureau (CFPB) for putting rules in place that “were reasonable from a servicing perspective. They weren’t as nearly as draconian as they might have been given the kind of enforcement mentality that you would expect from this management team.”

There were casualties and negative impacts within the industry, however. Not all default servicing businesses survived, and many of the financial services legal firms that aid servicers struggled adapting to the protracted low-volume environment. Some went out of business, while others were acquired by stronger companies, Sharga said. “We’ve also seen a lot of staff redeployed, which is good for the individuals at those companies.”

As we entered the last quarter of 2021, signs were beginning to show of a return to something resembling “normalcy.” RealtyTrac reported foreclosure activity started moving up modestly in September, a trend that Sharga expects to continue into the second half of 2022.

A growing number of lenders held on to their mortgage servicing rights in 2021, according to Allen Price, SVP of Sales, Marketing, and Client Management for BSI Financial. This led to growth opportunities for many industry subservicers. Price explained, “We saw the subservicing business grow not necessarily because there were a lot of contracts moving around, but because of the higher focus on retaining rights.”

However, there was a decline in mortgage servicing rights volume for BSI Financial as aggregators priced aggressively to build their portfolios, Price said. “Some were offering what we thought was crazy pricing. We thought some of that pricing was unrealistic relative to assets, so we didn’t play in that space.”

The Year to Come
“The likelihood is that foreclosures will pick up and get back to more normal levels,” Sharga said. However, any pickup in business will be deterred, at least temporarily, by continued restrictions on foreclosures by some states and municipalities. The varying assortment of local, state, and federal rules present regulatory and compliance challenges for servicers, Sharga said. “It’s probably a good time for servicers to be looking at their legal networks and making sure that their attorney firms are keeping up to date on state and local laws.”

While the bulk of people in forbearance were expected to exit those programs in 2021, others will exit at various times during the first three quarters of 2022. Sharga said he expects a return to normal foreclosure activity by the second half of the year. “We’re already starting to see that in our numbers.” Sharga noted that this increase in volumes may be challenging for some servicers, particularly those who are dealing with non-government-backed loans. “They may be under more pressure from note holders to move more quickly through foreclosure proceedings,” Sharga explained. “That may have them at odds with some of the ad hoc rules that are implemented by some states and municipal governments over the course of the next year.”

However, the bulk of activity will be for mortgages in the earlier stages of default, enabling many of those borrowers to sell their properties, rather than losing them in foreclosure auctions, Sharga said. “That’s something I think the industry needs to be thinking about as it prepares for a return of activity.”

Sarkar pointed out that it typically takes about 18 months for a family to feel the payment shock of life-changing events, such as job losses many suffered. Additionally, some newer homeowners may have bought at the top of the market. Any decline in property values will hurt their equity. As such, he expects more requests for modifications that aren’t COIVID-related.

Additionally, defaults tend to rise about two years after an origination boom.

“We’re gearing up for that,” Sarkar added. So far, at least, there is no indication of a return off “strategic defaulters”—borrowers in default using various legal maneuvers to stay in properties after default, which was a popular scheme during the Great Recession. Though there will be borrowers who try to ignore their financial responsibilities, Schachter doesn’t expect to see many.

“We learned a lot of things coming out of 2008 and getting through HARP and HAMP,” Schacter said, adding that low interest rates and strong home prices preclude a return to the 2008-2012 problems.

The consensus among industry experts is that we should expect a 25-50 basis point bump in interest rates.

“While what the Fed does on interest rates doesn’t directly affect mortgage rates, it does set the tone,” Sharga said. “A lot of that is already baked in. Interest rates staying low gives servicers some latitude for modifications.”

Higher interest rates will mean slower prepay speeds, so servicers will have assets on their balance sheets longer, Price said. Mason added that many servicers invested in technologies in 2021, including mobile, automated workflow with no-touch processes, that will enable them to be more efficient in 2022. “You can generate revenue if you’re smart about it, leveraging technology to do things in bulk, using straight-through processing, and taking a ‘no touch’ approach,” Mason said. “There are lots of ways to preserve your future in servicing, because not to do so is going to be the next disaster.”

Experts also anticipate an increase in M&A activity as private equity and hedge funds invest in the mortgage finance business, though they may outsource the actual servicing or acquire a servicing firm to handle the work, Price suggested.

Churchill Mortgage started its servicing business in 2020 because the market had seized up, so there was nowhere else to go with that part of the business, said Tom Gillen, SVP, Capital Markets for Churchill Mortgage. By the end of 2021, the company had built the servicing portfolio to $3.4 billion.

“Churchill Mortgage wasn’t alone in this, there were a lot of people who entered the servicing business because of the pandemic,” Gillen said. “They were looking at new assets on the books without any of the legacy issues that came back to bite other people. With sound management, it turned out to be a real boon for us.”

Growth will slow in 2022, so adding more servicing could add too much risk, Gillen said. “We believe that in a stepped approach to building a portfolio to where we are a little more comfortable with the risks.”

Gillen added that the market conditions prompting Churchill and others to initiate servicing in 2020 no longer exist, so he sees few, if any, servicing startups in 2022. Schachter also noted that barriers to entry are stronger than they were a few years ago.

Regulators will also carefully scrutinize and proposed mergers and acquisitions, Schachter said. “Approvals may not be as easy as some people expect, but consolidation will absolutely occur. There will be a flight to quality after rapid expansion.” He expects larger firms to continue to grow. Large lenders with diversified businesses could also look to add servicing operations.

Sourcepoint will be among the companies looking at acquisition targets, according to Schachter. Companies that don’t right size quickly enough are the most likely to be acquired, Rood said.

Schachter expects a significant amount of loan and MSR transfers in the new year as the focus shifts away from refinancing due to higher interest rates.

As companies buy and sell servicing and subservicing rights, it’s going to be important to be able to accurately trace and secure those transfers and ensure accurate reporting, Mason said. “In the future, there’s going to be even more scrutiny, particularly for subservicers.”

The Regulatory Front
Regulators will keep a watchful eye on how servicers treat borrowers, Price said. “The regulatory environment is going to be a little more onerous. Regulators are going to be very keen on making sure that servicers are doing everything they can to keep borrowers in their homes, that they are afforded several options and that foreclosure is a last result.”

Rood agreed, noting that “with the new administration, this is a reinvigorated enforcement regime.” He added that federal regulators have “made it clear that they are going to be scrutinizing and penalizing servicers for what [regulators] consider to be avoidable foreclosures that weren’t avoided. They’re going to be flipping every rock in your operations to identify whether by intent or by accident you ultimately harmed or didn’t serve a distressed customer.”

Furthermore, regulators will also likely scrutinize whether a servicer treated consumers any differently based on income, ethnicity, geography, or other demographic factors, Rood added. “HUD, DOJ, and CFPB (and others) will maximally enforce all fair lending laws under their jurisdiction,” he continued. “And, if history is any guide, the enforcement will push the boundaries of the law and will probably exceed them.”

Servicers will also need to comply with the new Fair Debt Collection Act (FDCPA), which went into effect on November 3, 2021. The FDCPA includes a pair of new rules, both which were issued in 2020. One is designed to clarify the prohibitions on harassment and abuse, false or misleading and unfair practice when collecting consumer debt. The other is designed to clarify disclosures debt collectors must provide to consumers when collection communications start.

According to the CFPB, “The second rule also prohibits debt collectors from suing or threatening to sue consumers on time-barred debt. Additionally, the second rule requires debt collectors to take specific steps to disclose the existence of a debt to consumers before reporting information about the debt to a consumer reporting agency.”

Gillen expects regulators to take some steps to address servicing backlogs as well as stronger efforts to ensure that servicers are abiding by rules already in place.

“Regulators aren’t going to tolerate servicers who don’t have the proper controls in place,” Schachter agreed. “They want to make sure that borrowers can use whatever channel (internet, phone, chat, etc.) they prefer; they expect servicers to have the technology in place to support all channels.

An Evolving Work Environment
Like many other businesses, servicers were just starting to move employees back into the office in 2021, and still had a larger percentage of remote workers at the end of the year than they did pre-pandemic. Allen expects the hybrid environment to continue, though BSI Financial and other servicers are still determining the optimum remote/in-office ratio. “I don’t know that ‘normal’ [work environment] is a term you can ever use again.”

Allen added that there are certain jobs with servicing firms and other financial services companies that necessitate a certain number of employees be in the office, but others will remain remote. About 30% of BSI Financial’s workers are remote today, a figure Allen expects to fall to closer to 20%, but that will still be at least double what it was before the pandemic. Some employees will have a combination of in-office and remote schedules.

“What we’re realizing as an industry is that a distributed workforce is probably better than a centralized workforce,” Sarkar said. “Once you distribute your workforce and your data points, you don’t have a centralized point of failure. Pipeline visibility has become much better because as a servicing manager, you can use the technology to see where your hotspots are.”

“It’s going to be challenging year, and I believe the industry will be up to the task,” Sharga said. “It’s important for default servicers not to rest on their laurels. There is a director at the CFPB who has already identified mortgage servicing is one of his highest priorities to watch over in the coming year. It’s imperative that servicers have their act together when it comes to borrower communication, loan remediation, and customer outreach.”

“We did some amazing things under incredible pressure in 2021,” Mason said. “Now we just need to continue to adopt those practices and continue to look to increase our responsiveness to customers and our operational visibility and resilience."

About Author: Phil Britt

Phil Britt started covering mortgages and other financial services matters for a suburban Chicago newspaper in the mid-1980s before joining Savings Institutions magazine in 1992. When the publication moved its offices to Washington, D.C., in 1993, he started his own editorial services room and continued to cover mortgages, other financial services subjects, and technology for a variety of websites and publications.

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