The Hurdles Ahead

This piece originally appeared in the January 2023 edition of DS News magazine, online now.

As the restfulness of the holidays slips into the rearview mirror and the mortgage industry returns to face the turmoil, surprises, and victories of a new year. While the housing landscape is, for the most part, no longer under the ponderous shadow of a global health crisis, there are plenty of challenges to be navigated. The Fed’s ongoing efforts to combat inflation have driven interest rates to highs not seen in years, flipping the homebuying frenzy of last year on its head even as many companies are forced to adjust their workforces in the shadow of a possible looming recession.

If the past decade has taught us anything, it’s that even the wisest among us don’t possess a crystal ball capable of prognosticating what the months ahead will bring. But all that said, the final days of a waning year and the first days of a new one are traditionally times to pause and reflect; to celebrate victories won, internalize the lessons of goals not achieved, and formulate a plan to move forward. In that spirit, for our January edition, DS News spoke with a cross-section of industry executives (including Five Star’s Editorial Advisory Board) about their 2022 victories and biggest 2023 challenges—and how they’re working to surmount them.

Read on for insights from representatives of BOK Financial, Carrington Mortgage Services, Chase Home Lending, Fannie Mae, Planet Home Lending, and U.S. Bank.

Samantha Manfer
Chief Business Development and Brand Officer, Planet Home Lending
What are the biggest challenges you are trying to solve for in 2023? How are you working to surmount those challenges?
Challenge #1 - As we head into a recessionary economy, delinquency and default rates may rise for non-QM, Debt Service Coverage Ratio (DSCR), and residential transition loans (RTL or fix-and-flip). Each non-QM, DSCR, and RTL investor must create loss mitigation policies and workflows.

Solution #1 - To maximize asset values, investors need strong subservicing and servicing partners experienced in default management, encompass everything from special forbearance to loan modifications and other default resolution options aimed at avoiding costly foreclosures. The end goal is to limit losses and optimize portfolios by employing proactive strategies for reducing default and foreclosure risk among this subset of potentially higher-risk borrowers—objectives that grow more critical during recessions.

Challenge #2 - Strong residential transition loans (fix-and-flip) origination, servicing, and asset management become critical during periods when property values stagnate or decline. When real estate markets are rising, flippers who experience cost overruns and project delays can often recoup those extra, unexpected costs. In a declining market, unanticipated costs and home price depreciation can leave flippers underwater.

Solution #2 - Hands-on, proven experience in RTL and renovation servicing can help protect portfolios in changing markets. The ability to have experts step in and complete RTL projects when borrowers default or walk away has been an advantage to our clients this past year. Planet Management Group’s high-touch asset managers have decades of advisory experience. The deep bench of data-driven, discerning professionals with robust asset class experience ensured clients’ RTL and renovation portfolios were optimized at every stage.

What are the victories from 2022 that you’re most proud of yourself and your team for accomplishing? What were the keys to success that enabled you to succeed in these areas?
To create a mortgage company built to last, you must have a sustainable business model that can withstand market fluctuations. Planet Financial Group’s wins in 2022 came about because we made strategic decisions and investments that make us better able to sustain difficult market conditions than single-channel companies focused on the short term.

Win #1 - Planet Home Lending earned Fannie Mae’s 2021 Servicer Total Achievement and Rewards (STAR) Program recognition, which acknowledges mortgage servicers for their effective, standardized processes that help drive their performance and operational success. We earned dual accolades in General Servicing and Solution Delivery, an accomplishment shared with only 10 of our peers across the industry.

Win #2 - Planet Home Lending acquired certain assets of the correspondent division of Home Point Financial Corporation (Homepoint), a $96 billion Ann Arbor, Michigan-based originator. The transaction more than doubled the company’s client base, bolstered the balance sheet, and created growth during a period when correspondent volumes were dropping industrywide.

Win #3 - Compliance reviews are a hidden win for most companies, including Planet. Unless there’s a finding resulting in a fine, you rarely hear about compliance reviews. Planet has a relentless, extraordinary cultural commitment to compliance.

We choose the right partners and employees, do business the right way, and say “no” even when it’s hard to do so.

Win #4 -The Planet Home Lending servicing portfolio grew to $72 billion at year-end 2022, up 44% over the year. Planet now serves more than a quarter million customers.

Michael Merritt
SVP, Customer Care and Mortgage Default Servicing, BOK Financial
What are the biggest challenges you are trying to solve for in 2023? How are you working to surmount those challenges?
Continuing to adapt to how to interact with customers using formats they prefer. We will focus on looking at new technology and platforms to better reach customers. We will also look holistically at all our training programs to refresh those and improve our customer-facing agents.

Next year could have more negative economic headwinds that will again stretch mortgage servicers’ capacity. COVID-19 made all of us more flexible and better at using resources in new ways to handle spikes in volumes. Even with historic volumes, we continued to deliver top-notch customer service and are focused on maintaining that high level of service going forward.

Default volumes are likely to increase in 2023. We may start to see more delays in the courts due to high volumes. We are focused on the strong relationships we have built with our critical vendors to help identify bottlenecks and solutions to avoid long delays.

With inflation concerns still present, rates will likely continue to rise. This impact will continue to put pressure on originations and begin to impact servicers more and more. We are working with investors and industry groups to proactively look at new solutions and options to meet customers’ needs.

What are the victories from 2022 that you’re most proud of yourself and your team for accomplishing? What were the keys to success that enabled you to succeed in these areas?
The year started with headwinds in loss mitigation and foreclosure areas as the COVID-19 impact was still being felt and the foreclosure moratoriums expired in January. Our teams were able to handle these historically high volumes and remain focused on getting customers to a positive resolution.

Throughout the year, the loss mitigation pipeline has shifted to more complete packet reviews. This process has required a different conversation with the customer upfront and more work throughout the process. The team pivoted and handled the change in workflow without missing a beat.

The last few years have involved more change from regulators and investors than I have seen in my career. I am so proud of how we effectively handled the changes and didn’t have any slippage in our performance day to day.

Candace Russell
VP–Post Sale, Carrington Mortgage Services
What are the biggest challenges you are trying to solve for in 2023? How are you working to surmount those challenges?
The real estate market and mortgage industry will continue to be challenged by the impact of rising interest rates. We expect the industry will begin to reckon with the consequences of a potential economic slowdown on the industry and customers. In 2023, firms will need to be agile and continually adapt to a changing market in order to be successful.

What are the victories from 2022 that you’re most proud of yourself and your team for accomplishing? What were the keys to success that enabled you to succeed in these areas?
The continued growth of the Carrington Mortgage Services servicing portfolio. CMS currently serves more than 650,000 borrowers.

Carrington continues to offer new products for brokers and consumers. These include ProcessIQ, where brokers have the option of having Carrington process the loan as part of its underwriting; second-lien loans for Carrington borrowers; and assumable mortgages. 2022 Carrington Charitable Foundation (CCF) successes include a successful close to Carrington House after building 28 homes for catastrophically wounded veterans. In 2022, CCF also introduced the Gold Star Family Housing Initiative. The Carrington Companies and CCF can make a huge difference in the lives of struggling Gold Star families by giving them a place to forever call home, relieved of the economic burden of a mortgage. In 2022, CCF assisted the families of U.S. Navy Lieutenant

(SEAL) Mike McGreevy and U.S. Navy Special Operations Chief Petty Officer (SEAL) David Fegyo—both of whom made the ultimate sacrifice while serving their country. There will be more Gold Star Family Housing Initiative families in 2023.

Erik Schmitt
Managing Director, Origination Division, Chase Home Lending [Editorial Advisory Board member] What are the biggest challenges you are trying to solve for in 2023? How are you working to surmount those challenges?
Three of the top industry challenges that Chase’s Home Lending team will work to tackle in 2023 are:

• Driving financial inclusion: Due to industrywide challenges with expanding access to sustainable credit and driving financial inclusion, Chase will continue to work with various investors, guarantors, regulators, industry participants, and stakeholders to propose solutions. We are also actively engaged in industrywide efforts led by OCC (Project REACh), MBA, SFA, and HPC to find new and innovative solutions.
• Improving loss mitigation toolkit: We are looking to ensure Chase and other servicers can provide industrywide solutions to assist distressed customers in a higher interest rate environment. Chase is working with trades (MBA/HPC/SFA), investors, guarantors, peer servicers, and regulators to propose solutions to help distressed customers achieve meaningful payment relief and avoid foreclosure.
• Making it simple to do business with Chase: We are focused on making it simple and seamless for customers to obtain a mortgage from Chase and for our advisors to deliver a remarkable experience.

Chase is investing in our people, technology, products, and policies to continuously improve the customer and employee experience.

What are the victories from 2022 that you’re most proud of yourself and your team for accomplishing? What were the keys to success that enabled you to succeed in these areas?
Chase Home Lending is proud of several key 2022 accomplishments that were achieved through working together as a team across the various disciplines within our business:

• High customer satisfaction achieved through relentlessly focusing on improving customer experience (JD Power Mortgage Originators Survey—No. 2 overall and JD Power Mortgage Servicers Survey—No. 5 overall)
• Making advancements in our digital platform including Chase MyHome, which won a Banking Tech Award for Best Use of IT in Lending.
• Continue to support and promote financial inclusion and make homebuying easier for all Americans through our Community and Affordable initiatives such as:
• Beginner to Buyer podcast named one of the 10 Best Personal Finance Podcasts of 2022 by U.S. News & World Report.
• Leveraging ECOA’s Special Purpose Credit Program to provide $5,000 homebuyer eligible in more than 10,000 census tracts—up from 6,700 earlier this year.

Douglas Whittemore
Head of Default Servicing, U.S. Bank (Editorial Advisory Board member)
What are the biggest challenges you are trying to solve for in 2023? How are you working to surmount those challenges?

• Macroeconomic Environment: Anytime we have a volatile and uncertain macroeconomic environment, it presents many complex challenges for mortgage servicers. Servicers need to balance costs/expenses, impact on customers, regulatory requirements, and servicing SLAs defined by investors, among many other items in their staffing and delinquency forecasts. 2023 may be one of the more uncertain markets we have seen in a long time with headwinds, tailwinds, and crosswinds all blowing at the same time. We will have more factors to consider that may, in the end, offset, or they could generate multiyear market and housing volatility that servicers will need to navigate.
• Unemployment: This is always top-of-mind for servicers and is a key driver in forecasting delinquencies. However, this may be more of a regional issue than nationwide one as we move forward. We have recently seen big tech make announcements of layoffs, and more than likely will see more as the tech sector compresses to align more with a post-pandemic world that sees more people travel, return to the office, and reduce spending. As most companies try to avoid layoffs during the holiday season, Q1 2023 may be the first read we get on what corporations have planned to address earnings and revenue pressures. While we are cautiously optimistic some markets that are experiencing continued labor shortages may be able to digest increased layoffs, others may not have that capacity, leading to regional spikes in defaults.
• Inflation: Inflation continues to be a global issue impacting supply chains, goods, and services everywhere while wage growth has not kept up at the same pace. Even if unemployment remains stable and low, persistent and prolonged inflation can eat away at household savings, further pressuring delinquencies and affordability. This is not only due to higher costs for consumer goods; taxes and insurance (escrow payments) can also increase, putting more pressure on affordability.
• Interest Rates: A rising and volatile rate environment puts pressure on more than the demand side of autos, housing, and cost credit. The trickle-down impact on corporate earnings, household balance sheets, and equities can all directly impact a customer’s ability to repay mortgage debt. Even more important is the impact on government-insured mortgages and their loss mitigation programs. This primarily would be loans sold into GNMA trusts backed by FHA, VA, and USDA. As rates rise above the customers’ existing note rates, it can limit a servicer’s ability to assist customers with payment relief as the overall mechanics, waterfalls, and economics can be prohibitive to do so without putting some lenders at material risk of liquidity. The industry, in cooperation with the Housing Policy Council, continues to press for solutions, but meanwhile, each servicer will need to devise their own tools and tolerances within HUD guidelines to maximize their ability to assist customers with payment relief.
• Asset Prices: Home and auto values will continue to play a very important role in this cycle. Homeowners are sitting on a record amount of equity this time when compared to the housing crisis of 2008. This enables most homeowners to exit, sell for a gain, and use the proceeds to downsize or find alternative housing. The risk here is, with elevated rates and slowing demand, any major wave of homes hitting the market could put immediate pressure on home values. Once again, this should be more of a regional issue, but with such a lack of demand, it’s something that could rapidly shift if a region were to experience a severe spike in unemployment. The hedge we have today is an equal void of sellers: those sitting on a low, 30-year fixed rate will be more than likely to remain in their home for a longer duration, keeping supply in balance. Monitoring regional unemployment rates will be key.
• Geopolitics: The main driver here is the cost of energy, oil, and supply chains. If we see stabilization in China and Ukraine, this could be a massive tailwind for consumers as it should lead to a drop in energy prices and ultimately offer support to the equities markets, bolstering household balance sheets and consumer sentiment. As crazy as it may sound, we could see a direct benefit in consumer delinquencies as a byproduct of stabilization in these regions.
• Corporate Earnings: Q1 and Q2 earnings will be heavily watched as corporations lay out the guidance for the year. Why is this so important? These earnings will give insight into layoffs, wage growth, consumer spending, delinquency trends, and other critical data points that will influence market volatility, interest rates, and asset prices.

All of the above are part of the complex environment that will ultimately lead to what has been commonly referred to as a post-pandemic “soft” or “hard” landing. All servicers can do is build into their plans what data points will they ascribe the most weight to trigger a certain plan or aspect of it. How will you address with customers a sustained, high-rate environment with government-backed loans?

How will servicers communicate and educate a customer on the importance of acting swiftly to preserve and protect their credit and equity? What are servicers doing to remove as much friction and simplify their processes for customers to gain assistance? What digital, DIY, and DIT capabilities are servicers driving to improve and implement? How can servicers increase customer engagement even when the only solution may be the customer selling and transitioning to a more affordable long-term housing solution?

We at USB have plans in place to tackle the above, most of which I am not at liberty to discuss in a public forum. However, I think we can accomplish as much as an industry when we share the questions and challenges we should all have on our radar. I believe that can be just as effective when we take our common problems, concerns, and questions to the industry trade groups such as Five Star to bring us together and discuss ideas.

One thing is for certain: if you’re a default leader and you’re not thinking about the above items and establishing plans for several scenarios, you will be caught off guard in 2023.

Jake Williamson
SVP, Single-Family Collateral Risk Management, Fannie Mae (Editorial Advisory Board Member)
What are the biggest challenges you are trying to solve for in 2023? How are you working to surmount those challenges?
It’s been more than 50 years since President Lyndon B. Johnson signed the Fair Housing Act, yet the vast gap in homeownership rates between Black and white people remains. In June 2022, Fannie Mae released its Equitable Housing Finance Plan, which outlines a range of specific actions Fannie Mae is taking over the next three years to knock down barriers faced by Black homeowners and renters throughout their housing journey. Just one piece of a much larger and evolving strategy for Fannie Mae, the plan addresses inequalities in the housing finance system and extends the wealth-building benefits of homeownership, including in areas related to home valuations.

As part of the Plan, Fannie Mae is taking steps to support a more equitable valuation process and reduce the potential for appraisal bias through data analysis, quality control, monitoring trends, industry engagements, and technology. In addition, we are continuing to work with industry partners to expand the Appraiser Diversity Initiative (ADI), which is designed to attract new entrants to the residential appraisal field, overcome barriers to entry (such as education, training, and experience requirements), and foster diversity in the appraisal workforce. In 2022, the ADI provided 330 scholarships and will continue to grow that number in the coming years.

Especially with high interest rates and changing economic and housing market conditions, homeowners experiencing temporary financial hardship will need assistance to manage through that uncertainty and stay in their homes. Through mortgage forbearance and loan modification/payment deferral plans, we will maintain our loss mitigation options for servicers and borrowers in order to manage delinquent mortgage loans and avoid foreclosure. We will also continue to provide access to Fannie Mae’s Disaster Response Network, which offers homeowners personalized support navigating the mortgage assistance or natural disaster recovery process.

In addition, given the market uncertainty and an expected modest recession, proactive risk management will be key. Maintaining loan quality and strong risk management as the cycle continues downward and interest rates remain high will be a top priority for 2023. Through strong partnerships with our lenders, our shared commitment to loan quality, risk oversight, and quality control delivers certainty to both lenders and Fannie Mae during the origination and underwriting process, while ensuring that new homeowners are placed in a mortgage that supports sustainable homeownership.

What are the victories from 2022 that you’re most proud of yourself and your team for accomplishing? What were the keys to success that enabled you to succeed in these areas?
The journey to modernize the valuation process had some notable wins in 2022. Fannie Mae has been working with mortgage lenders, appraisers, and industry technology providers for several years to test digital innovation and alternative ways of conducting appraisals. And we made significant progress on our appraisal modernization journey, especially as new technological capabilities and process innovation

have allowed the industry to manage collateral risks with more dynamic and targeted solutions.

Desktop and hybrid appraisals allow appraisers to be more productive—they do not have to schedule appointments or visit properties but can still access comprehensive property information to confidently fulfill valuation requests, helping to alleviate capacity constraints.

We also relaunched the value acceptance + property data pilot for eligible properties this year, also known as inspection-based appraisal waivers. With these alternative valuation approaches, we’re seeing a shorter appraisal process and the potential for reducing borrower costs.

Also, on many loan transactions, we can offer a value acceptance (appraisal waiver) through our automated underwriting system, most often for home refinances or some purchases with a large down payment, because we are confident that the estimated property value submitted by the lender is consistent with expectations in the current market. Based on a Fannie Mae analysis of loan delivery data from January 2020 through October 2022, we estimate that value acceptance on loans sold to us saved mortgage borrowers more than $2.1 billion. These changes are just a few examples of how we’re continuing to create efficiency and value for appraisal professionals, consumers, and the mortgage industry.

Fannie Mae’s efforts to eradicate appraisal bias also continue to show progress. We are committed to an efficient, effective, and equitable home valuation process and are working with the industry to continue to identify root causes and drive meaningful change related to appraisal bias through appraisal modernization, research, and analysis, fostering diversity in the appraiser workforce, and Appraiser Quality Monitoring (AQM). In February 2022, Fannie Mae produced a robust paper on the frequency and severity of appraisal bias and shared valuable insights on root causes and potential solutions. Additionally, we scanned 14 million appraisals from 2019 and 2020 to determine the extent of appraisers using problematic words and language specifically prohibited in Fannie Mae’s Selling Guide, and then, through our AQM process, shared feedback letters with appraisers who had a high frequency of findings. We conducted our second round of text scanning on appraisals last year, and nearly 80% of the appraisers who previously received an education letter did not have a new finding. We also have a state referral process for egregious appraisal bias findings. In addition, we implemented an undervaluation risk flag in Collateral Underwriter to help lenders and our internal reviewers identify appraisals with a high risk of potential undervaluation or bias early in the process.

With a national housing supply crisis and shortage of affordable housing options, we’ve doubled down on our efforts to repair and preserve our real estate-owned (REO) single-family homes and put them back in the hands of owner- occupants—and, in many cases, into the hands of first-time homebuyers. We renovate REO homes by completing a wide range of repairs, including cosmetic upgrades; necessary plumbing, electric, and HVAC repairs; and addressing any environmental or health issues, such as lead-based paint. We are seeing incredible results and benefits from this work. In March 2022, 95% of repaired properties in our REO portfolio were sold to owner-occupant buyers. In 2023, we will continue to build on our repair strategy to help create affordable and sustainable homeownership opportunities, which contributes to community stabilization and improves the nation’s housing supply.