Keeping Afloat

This piece originally appeared in the July 2023 edition of MortgagePoint magazine, online now.

When assessing the state of the mortgage servicing space midway through 2023, several factors come into play. Forces are pushing and pulling at the housing industry from multiple angles as buyers struggle with affordability issues amid ongoing fears of an economic recession.

The Mortgage Bankers Association’s (MBA) latest Loan Monitoring Survey revealed that the total number of loans now in forbearance decreased by two basis points from 0.51% of servicers’ portfolio volume in April 2023 to 0.49% as of May 31, 2023.

According to the MBA, an estimated 245,000 U.S. homeowners remain in forbearance plans. And since March 2020, mortgage servicers have provided forbearance opportunities to approximately 7.9 million borrowers.

Collaboration between the servicing industry and government agencies proved to be successful for many Americans in providing home retention solutions during the time of the pandemic. A recent white paper from Legal League 100’s Special Initiatives Working Group (SIWG), entitled The Homeowner Assistance Fund: The Current Status of the HAF Program in Select Jurisdictions, examined how the Homeowner Assistance Fund (HAF) provided relief for homeowners in U.S. states, U.S. territories, and Tribal governments during the time of the pandemic.

On March 11, 2021, President Joe Biden signed The American Rescue Plan Act of 2021 into law, which established the HAF, which was to provide up to $9.961 billion in financial relief for struggling homeowners nationwide. HAF’s purpose was to prevent mortgage delinquencies and defaults, foreclosures, loss of utilities or home energy services, and displacement of homeowners experiencing financial hardship after January 21, 2020. It has been found that HAF assistance extended to a broader range of economically vulnerable and traditionally underserved homeowners than prior federal mortgage assistance and foreclosure prevention programs.

Fitch Ratings recently reported that from Q3 2022 to Q4 2022, bank and nonbank servicers reported a continuing decrease in loan modifications quarter over quarter, reaching 25% from 31%, and 16.5% from 17%, respectively. Borrower assistance programs accounted for 44% of monthly loss mitigation workout volume for bank servicers in Q4 2022, an increase from 2.39% over Q3 2022, while nonbank servicers reported a 9% decline from the previous quarter to 20.55% in Q4 2022.

In mid-June, the Federal Reserve paused its series of aggressive rate hikes in its goal to ease inflation. However, as First American Deputy Chief Economist Odeta Kushi noted that the Fed’s actions may not be achieving their intended goals:

“Inflation and the labor market are not responding as the Fed expected, according to the FOMC’s latest Summary of Economic Projections,” Kushi noted. “The unemployment rate ticked up to 3.7% in May, while the March FOMC projections expected the unemployment rate to reach 4.5% by the fourth quarter of 2023. The Fed also expected core PCE (Personal Consumption Expenditures) to decline to 3.6% year over year by the fourth quarter, yet it remained at 4.7% as of April. In both cases, nearly an entire percentage point for each indicator is a wide gulf to cross in the next six months and unlikely to happen at the current pace of change without a significant shift in economic conditions. The Fed remains data-dependent. More months of above-expectation economic indicators increases the likelihood that more rate hikes are ahead.”

As we reach the midway point of the year, MortgagePoint magazine gathered several industry experts to discuss the state of the mortgage servicing marketplace through mergers and acquisitions; new tech enhancements to bolster workflows; and preparing for future trends, among other topics discussed. Many thanks to Michael Keaton, SVP, Default Subservicing for PHH Mortgage Corporation; Jason Kwasny, Chief Servicing Officer for Servbank; Jocelyn Martin-Leano, Chair of the National Mortgage Servicing Association (NMSA); Michael Merritt, SVP, Customer Care and Mortgage Default Servicing for BOK Financial; Candace Russell, VP-Post Sale for Carrington Mortgage Services, LLC for sharing their insight and expertise with our readers.

Q: How would you assess the current state of the mortgage servicer marketplace?
Michael Keaton: The state of the mortgage servicing marketplace is strong. Originators and investors in mortgage servicing rights (MSRs) have many different servicing options. That said, we have seen more consolidation in the last 12 to 18 months than we did in the period before COVID-19.

Servicing is not easy, as margins are thin, and accuracy and precision are critical. Owners of MSRs need a strong and competent servicer who pays exceptional attention to detail, delivers on their commitments, and treats their homeowners as key customers.

Jason Kwasny: The current state of the mortgage servicing marketplace is in flux. After the massive growth seen under the low interest rate-fueled originations boom, we are seeing a slowdown of new loans overall coming in upstream, along with an increase in interest rates.

We are also seeing an elevated number of loans being service-transferred as an increasing number of originators are selling their MSRs to free up liquidity. This has placed a great deal of stress on the broader industry, more specifically on a mortgage servicer’s ability to properly and efficiently transfer loans with minimal customer disruption.

Like any industry, when companies are placed under stress, their weaknesses are exposed. As a result, you get to see who has the proper processes and procedures and skilled personnel in place to handle the high volume of transfers.

At Servbank, we have the loan-transfer process down to a science with a fully assisted, stress-tested transfer process that is entirely transparent. We are obsessed with and truly care about the customer and client experience, so whether those loans are coming to us or leaving, through our processes and actions, we make transferring loans a seamless and worry-free process for our clients and customers.

Jocelyn Martin-Leano: The cost of servicing defaulted loans has gone up and loss mitigation has been challenging in an elevated rate environment. Fortunately, the combination of strong borrower equity positions and government programs to keep borrowers in their homes have kept delinquencies and foreclosures at pre-pandemic levels. That said, technology improvements that brought about productivity—such as AI usage in call centers—have helped offset costs.

The adoption of disruptive technology like AI and machine learning (ML) continues to be constrained to smaller-use cases than larger-scale applications due to the complexity of getting servicer data “AI-ready.” Large platform providers are not digital native, and that causes solutions that are hybrid legacy with bolt-on AI solutions.

Michael Merritt: Most servicers are working through the final group of COVID-19-impacted borrowers to ensure they receive the right workout after their forbearance plans end to get the customer back on track. There are still loans where servicers have been unable to reach the customer and default activity is continuing, leading to elevated volumes.

The industry is also moving into the “lessons learned” process from COVID-19 to prepare for any future increase in defaults.

One of the common hurdles I hear about is how to deliver loss mitigation workouts in a high-interest-rate environment since traditional mods would increase the customer’s rate significantly. The industry is partnering with the GSEs and agencies to plan for more effective loss mitigation options to help with this issue.

Candace Russell: Servicing has always been, in my opinion, a specialty market, especially default servicing. With the current rate environment, servicing is not only necessary but also an unexpected place of stability for some players. Data from the Mortgage Bankers Association (MBA) shows us that servicing is stabilizing shops right now. The marketplace is full of opportunity in that being good at servicing, regulatory change management, and loss mitigation is a very specific formula, and when done well, can make you valuable in the current ecosystem.

Carrington Mortgage Services realizes the importance of being a trusted servicer and has opened opportunities such as being selected to assume the Master Servicer position for the Reverse Mortgage Funding portfolio. Unusual times present unusual opportunities.

Q: What pain points, if any, have you experienced to date?
Kwasny: As a company that is obsessed with experience and driven by a mission to create excellence, our pain points exist where we do not have full control over the entire process. This usually exists where we use vendors or must rely on other servicer’s execution. These are the points that allow for opportunities for there to be something other than an optimal outcome.

For example, in terms of escrow … it is one of the most common complaint areas in servicing. Aside from it being a subject that is complex to customers, most servicers, including us, have to rely on vendors. As we know with vendors, execution can be subpar at times, even when we attempt to hold our vendors to the highest of standards.

Another example is service transfers. Some servicers are better at it than others, and it is the ones who aren’t very good at it or simply do not care about their customer or client experience that cause the biggest headaches.

The transfer data is inconsistent, lacking key information, or in some cases just wrong altogether. Meanwhile, their communication with customers about the transfer is like the data … it is inconsistent, lacking key info, or in some cases, just wrong. We do not just assume that our vendors and other subservicers will operate with perfection. In the end, we own the relationship with the customer and clients, so we must engineer solutions to ensure our customers and clients still get the best experience.

As such, we put what we call “bubble wrap” around those points that exist where we do not control the entire process, such as with vendors or other subservicers, to protect the experience we want to deliver.

This “bubble wrap” consists of extra layers of oversight, more frequent calibration meetings, triple data validation checks, or in some cases, taking an entire process in-house where we feel the vendor cannot meet our standards. It is a perpetual “trust but verify” philosophy on steroids. This approach allows us to definitively say that, regardless of the situation or circumstance, we still deliver a frictionless, top-quality experience for our customers and clients.

Martin-Leano: The proliferation of state guidelines has challenged platform-system providers to keep up with industry changes. Most of these state rules require implementation during short timeframes, thus causing servicers to create inelegant, manual-based solutions until service providers can keep up.

Vendors who serve the origination space have been challenged as well. These challenges impact their capabilities to deploy capital to invest in their product offerings for servicing.

Russell: Carrington Mortgage Services experiences the industrywide “sprinters pace and marathon length” of the attempt to support customers through loss mitigation changes, which came fast and furious, and are still being enacted and retooled three years later. Beyond industrywide experiences, as a successful asset manager, we have not experienced quite as many pain points given the self-hedged nature of our platform, which is critically important in the current environment. Our origination and servicing businesses complement and support each other through any undulation in the markets.

Q: What trends are you seeing in the servicer space?
Martin-Leano: Employee engagement and hybrid work situations continue to evolve and affect the servicing space. Origination excess labor capacity has little room for absorption in servicing as loss mitigation, a typical spot for displaced LOs has low demand. These tend to be symbiotic; instead, both are moving in parallel with no countercyclicality.

Q: How has inflation impacted your volume?
Keaton: We have not seen inflation impact our subservicing and origination volumes per se, but like most nonbank servicers and originators, we have felt the pinch of higher interest rates. Industry origination volumes are down compared to 18 to 24 months ago, which hurts originations. However, prepayment speeds are also down, which is a boost for servicing.

Merritt: Inflation has had an interesting impact on volumes, really leading to volatility in the marketplace. With higher rates, there has been less run-off of the servicing portfolio. However, there is less inflow from originations as well.

MSR values have been strong with the higher rates, but many companies have used the increase in those valuable assets for liquidity help in a tightening credit environment, making some transactions more difficult to price effectively. These factors have led to some of the consolidations we have seen this year in the servicing industry.

Q: Have you seen an expansion or contraction in the servicing industry?
Kwasny: With the upstream pipeline of newly originated loans slowing down and the resulting downstream movement of loans themselves due to MSR sales, it has led to some consolidation. With more loans being placed with fewer servicers, this is impacting the quality of service.

From that broader perspective, I would say that we are in a fluctuation phase for the servicing industry. Of course, this is not on the scale that is occurring with originators, for obvious reasons, but there is fluctuation, nonetheless.

Martin-Leano: Rumors of large servicers that are for sale and few large players that have the wherewithal, capital, and appetite to acquire may lead to concentration of servicing in the hands of a few players. Is the industry prepared for its own version of “Too Big to Fail?”

Banks may be moving loans out of their portfolio especially should a downturn occur, and I am seeing fewer special servicers because of the strong economy.

Russell: The origination side of the house has seen some contraction due to the nature of the current rate environment. As for servicing, after three-plus years of focusing heavily on COVID-19 solutions, I have noticed a contraction in third-party vendor solutions/options, but only a minor consolidation in active servicing-focused shops.

Q: What are some of the ways in which your company retains and attracts top talent?
Keaton: We place significant focus on our people through fostering and measuring employee engagement; committing to comprehensive Diversity, Equity, and Inclusion (DEI) initiatives; and developing a working environment and culture that fosters our company values. We regularly measure employee engagement—our employees’ pride, energy, and optimism that fuels their effort—and implement action plans that respond to employee feedback.

We are committed to being a globally diverse and inclusive workplace where every voice is heard and valued. Our affinity groups like the Ocwen Global Women’s Network (OGWN), LEAP Black professionals’ network, FREE (Freedom, Respect, Expression, Equality) an affinity group for LGBTQ+ employees, and mentoring programs, when coupled with a culture of appreciation and collaboration, help provide a comprehensive ecosystem for our team to flourish.

Our programs support employee needs for both work and life, including Fun@Work events, paid time off for volunteering, and wellness programs for physical, mental, and financial health. Additionally, many of our roles are also eligible for hybrid telecommuting opportunities.

Merritt: We are focused on our culture and believe it is a differentiator. A major element of our culture is offering enrichment opportunities for our employees. We offer LinkedIn Learning and other tools to allow our employees to learn new skills in a variety of fields.

COVID-19 also showed the importance of transparent communication about our goals, priorities, and results. To meet this need, we have added additional meeting cadences and communication tools to ensure our employees are plugged into our mission.

We have incorporated a hybrid work arrangement based on employee feedback. We have optimized our schedule to create collaboration opportunities for teams when they are in the office. We have also implemented a nesting period to help new employees integrate with the company and their teams successfully.

Q: Are there any new tools you and your company are utilizing to enhance your business?
Keaton: In servicing, we continue to strive to enhance the homeowner experience. These new tools fall into two broad categories: providing the homeowner with additional self-service tools, and optimizing the way we communicate with them. We have rolled out a new series of personalized custom videos to help homeowners understand key events, such as loan transfers and annual escrow analysis. We have also released our new natural speech chatbot that allows homeowners to ask us freeform text questions, and they receive real-time answers while fulfilling their requests.

Kwasny: Servbank has always been at the leading edge of technology in the servicing space, both in our internal and external systems and offerings. All those offerings are part of our SIME (Servicing Intelligence Made Easy) platform and within that ecosystem. This proprietary servicing platform gives our clients a fully transparent, 100% accessible, real-time, on-demand view of their portfolio, along with access to 100-plus customizable reports, the ability to listen to recorded customer calls, get escrow analysis, and more. They can access predictive, current, and historical data, allowing for complete oversight and precise risk management, enabling them to learn from the past, adapt to the present, plan for the future, and more.

For our customers, this platform powers the mobile app, simple-to-navigate website, and suite of self-service options, so our customers can manage their accounts and rapidly get the answers they need when they want them. But technology is only half the story. We fully believe in the human experience just as much, which is why at Servbank, we heavily invest in our fleet of experienced and caring agents that leverage our technology to deliver the one-call customer experience that exceeds industry standards.

As noted earlier, we are obsessed with the customer experience and understand how critical it is for our clients and for us as a servicer to build that loyalty with customers.

As a result, we leverage every interaction, whether over the phone, on the web, or through our app, as an opportunity to deepen the relationship with customers.

Merritt: A top priority has been to continue improving and evolving our communication with borrowers. We are looking at each communication channel to eliminate pain points and expand self-service options to better serve customers where they want to communicate.

Another area we are focused on is better serving our customers. We are taking a multifaceted approach by using screen pops with key information for phone agents, a library of articles, job aids for all employees, and are using better AI tools to help improve self-service options.

Russell: We continually look at new technology and are continually upgrading where it makes sense. Any opportunity to meet our customers’ needs and preferences is always being considered.

Q: The Mortgage Bankers Association has forecast an economic slowdown and an increase in unemployment later this year and into 2024. How will your company prepare for this shift in the market, and what measures are being taken in advance of this possible shift?
Keaton: It is reasonable to assume that delinquencies may begin to increase later this year, depending on the economic climate. Enhancing self-service tools and simplifying loss mitigation processes helps ensure that homeowners needing assistance have a hassle-free experience and get the support that they need. We believe our broad servicing capabilities, particularly our proven leadership and experience in special servicing, position us well for this scenario.

Kwasny: Regardless of the forecast of the MBA, if you are worth your salt as a servicer, you should be prepared for any change in the economy.

For example, in the case of an economic slowdown, where delinquencies would be expected to rise, you should already have robust and dynamic collections and loss mitigation infrastructure in place that can scale to meet that demand.

Conversely, if the economy starts going gangbusters or rates drop and originations heat up, you should be in a position to be able to handle that influx of new customers while still delivering a top-notch customer experience.

Regardless of the environment, you need to be able to do it compliantly. Not just because the CFPB is lurking, but because it is the right thing to do. In other words, as a servicer, you need to always be in a position to deal with any short-term market shift or longer-term change in market trends. At Servbank, we unambiguously understand this, which is why we are continually investing so much in our technology, our people, and our processes. Our customers and clients expect superior service, which is why we operate on a footing that is prepared for any eventuality. This is how we have and continue to deliver a 91% one-call resolution rate, 99% customer satisfaction rate, and an industry-leading 84% Net Promoter Score. Not to mention our delinquency and loss mitigation metrics are better than the industry averages.

To my earlier point about servicers being able to handle all eventualities, we were able to deliver these numbers even during the height of the pandemic. So, as a servicer, if you cannot confidently say you are ready for what is next, regardless of what that next is, then it is time to get to work!

Russell: Carrington Mortgage Services has a history of being a well-situated and trusted servicer. One unique quality may be that we will not have to “shift,” because we have been in preparation for these possibilities for years. The ability to look forward and make decisions based on what the long-term environment is going to look like, and not just make adjustments due to more immediate concerns, has set us up for success for the current and future economic environments.

Q: What is your assessment of the servicing landscape for the remainder of 2023 and beyond?
Martin-Leano: The deployment of technology continues to be a challenge. Will there be a disruptive player that can take technology to the next level?

In terms of loss mitigation programs mandated by the government, will they impact capital markets’ appetite, especially in the private mortgage space? How will the upcoming elections affect housing policy and the depth and extent of the programs to keep people in their homes? These are the primary questions being asked as we moved forward through 2023 and beyond.

Merritt: With the current macroeconomic factors, I would expect the next 12 to 18 months will continue to be challenging in the servicing space. These economic pressures will most likely lead to increased default volumes. I expect a variety of new loss mitigation programs that will be released by the GSEs and agencies to give additional tools to offer programs in a high-rate environment. The good news is that the servicing industry has a proven track record of meeting these types of challenges and will be ready to help homeowners that are impacted.

Longer term, the mortgage servicing industry is ripe for a technological revolution. Key systems, vendors, and tools are all exploring ways to utilize AI to streamline processes and deliver more consistent results and better customer experiences. I think we will make great strides in delivering new and impactful ways for our customers.