This piece originally appeared in the September 2022 edition of DS News magazine, online now [1].
Speaking during a recent Five Star webinar entitled “Is 2022-23 Really the Golden Age of Mortgage Servicing? [2]” Seth Sprague, CMB, Director of Consulting Services for Richey May [3], noted that, traditionally speaking, mortgage servicers fare best in periods like the one we're currently experiencing: eras featuring slow, voluntary prepayments; timely payments; and low levels of delinquencies.
“There's been a lot of effort in this industry on quality of the originations, and we are seeing that in the servicing portfolios that exist today,” Sprague added. “The whole trick on servicing cash flows is to have borrowers who are making timely payments, [and to] have an efficient technology stack that intercedes with those customers as they want to be interacted with.”
Such a technology stack enables a servicer to keep costs down, revenue high, and—most importantly—advances low, Sprague explained.
But with the originations side of the industry facing headwinds in the form of continued interest-rate increases and the resulting economic slowdown as the Fed attempts to steer around a possible recession, is the back half of 2022 genuinely shaping up to be a servicing “Golden Age?” Joining Sprague to comment on the topic were Jay Jones, EVP of Servicing for Mr. Cooper [4]; Dan Sogorka, President and CEO of Sagent [5]; and Julian Hebron, Founder of The Basis Point [6], a “a sales & marketing strategy consultancy for banks, lenders, and fintechs.”
The State of the Industry
During the height of COVID-19, forbearance numbers spiked as the government intervened to try to help mitigate the impacts of the pandemic and keep as many struggling homeowners in their homes as possible during the global health crisis. As those have begun to wind down and delinquencies and advances have dropped, mortgage servicers are enjoying strong cash flows, according to Sprague.
“Strategy is very important based on your overall business model, and it's important that your strategy aligns with your core competencies, your technology, and what your consumers are telling you,” Sprague said.
Consumers are demanding more loan transparency today, as well as easy access to their information, said Jay Jones, EVP of Servicing at Mr. Cooper. They expect servicers to perform at a certain level, regardless of what's going on in the environment.
Sagent saw an opportunity to increase focus on consumer needs and expectations, as a way to differentiate the company in a crowded market, said Dan Sogorka, President and CEO of Sagent. “If you do that, you can actually make money as a servicer. This can be a good business for you.”
Giving Consumers What They Need (and Want)
With foreclosures back at pre-pandemic levels, servicers can now help consumers resolve their payments by offering customer-facing tools that offer them easy access to their information, Sogorka said. “You want them to be able to self-service.”
“We have to listen to our customers,” Jones added. They need to be able to indicate when they’re having a challenge, while servicers need to understand the borrower’s situation.
“We’ve had default cycles and rising rate environments,” Jones said. But there hasn’t been this much equity in the market before, meaning borrower behavior may be different than it has been in the past.
If a borrower has had a modification in the last couple of years, it may be difficult to get another one. If they're already at very low rates and have already deferred some principal, it may be time to discuss selling their home, Jones said. “It's really about listening to that consumer, understanding where they are currently in this environment, and then understanding what their options are.”
Simply having a few delinquent loans in a judicial foreclosure state or a high-tax-insurance state that happens to be judicial can really have a negative impact on the cash flows, Sprague said. Though servicing values have increased, prepayment speeds have slowed.
It's important to look at the actual cash received from servicing—real cash, real expenses, real advances, Sprague added. “You need to look in more detail at what is the true advance and what could be your advances in the future. Are you ready for that? Do you have enough cash to handle that? What are your contingencies? Understanding that cash implication of servicing is critical.”
Marrying Compliance With Customer Service
“Servicing has gotten complex,” Jones said. “Some of the compliance rules are complex. You need technology that allows you to understand what the rules are, what the options are, and how you move to the next step.”
According to Jones, the 2008 market taught servicers some important lessons in handling compliance.
“You have to have a robust system that allows you to manage processes inside of it that are compliant. We are always going to have exceptions, but taking that system and using the data that we have behind it to understand what's going on with the customers, what they qualify for, what they may have already been denied for, and what your next talk step is going to be [is critical]. You need a system that's robust enough to handle all that complexity while you're on the phone with a consumer.”
The consumer is expecting and demanding that the servicer have all this information readily available. They may want to know what their options are, to understand what they should do next to make sure they stay in their home, which is what everyone's goal is going to be at the end of the day, Jones explained.
Servicers need to have the right system in place, with the right compliance rules, in order to best service the customer while also protecting the servicer and informing the customers of the next steps in the process, Jones said.
Data Quality
The industry’s data quality has improved tremendously. Sprague noted that consumers are now being contacted quickly after a payment is late, rather than seeing that contact occur after day 45 of a delinquency.
“You have to make sure that the servicer is the trusted advisor in this space. I know Mr. Cooper and others are very proactive in trying to get to those borrowers and say, ‘We're here to help you.’ The industry, to a degree, has overcome some of its past sins. We've got good quality
borrowers, we have good-quality data, and we have better-quality systems than we've had in the past.”
Better outcomes lead to lower costs, lower advances, and better profitability, Sprague noted.
“But you need to have that right synchronization across those metrics and that technology stack.”
The servicing system needs to handle data properly, Sogorka said, pointing out that the transfer of servicing rights has been problematic in the past. “We’re making that better. We're spending a lot of time on the technology, to board the loan effectively to get the right information at the right time, automating that so there's not a lot of human error involved in that and get us away from spreadsheets and Excel.”
The industry has largely moved away from siloed origination and servicing businesses, Sogorka added. It should be easy to obtain any product that a financial service firm offers, which wasn’t the case in a siloed environment.
The right system and tools are essential, Jones agreed. “The penalties can be significant. Not only are you impacting the customer who you want to refi down on the road, you can have compliance risk and compliance cost.”
A Golden Age?
“If you have the right technology and you can use data to take advantage of your interactions with your consumer, you're going to grow that relationship,” Jones said. When you show the consumer that you are concerned about their assets, that you are educating them about the things that they need to do to protect their home, your value is going to continue to go up. Consumers are staying with a servicer for a longer period of time.
It's a challenging business, Sogorka cautioned. The hours are long, and it only takes a couple of mistakes out of thousands to have a huge negative impact on the business.
The uncertainty of cash flows or uncertainty of economic conditions doesn't cause MSR values to continue to go up; rather it’s prepayment speeds and higher escrow earnings, Sprague said. “The uncertainty with the current inflation might be causing more uncertainty around the cash flows. It's not always a home run. Elevated delinquencies, or a little bit of elevated servicing costs, could cause MSRs not to be as valuable.”
“When you think about the consumer today, the short answer is: it should be the golden age,” Jones said. Many consumers are living in homes they love, with low rates, and no desire to move, particularly if they are working from home.
“The challenge you have is all the things that are impacting our customers today outside of the mortgage,” Jones added—issues ranging from inflation to lingering COVID-19 challenges and other issues.
“Some of the new customers that we have are going to want more tech than we have today,” Jones added. “They're going to have more interaction from the tools that we have to continue to create. So I would say there is a generation, where this will be the golden age for sure. But there are caveats because of so much of the market environment around them—as it continues to change, so will their needs.”
Another thing that needs to change is quicker, more transparent information to customers about servicing transfers, Jones says.
Sprague added that there is currently much confusion among consumers about when a transfer actually occurs.
“Outside of our industry, no one has a clue about this stuff,” Sogorka said. “We're two-and-a-half years into a journey of fixing the servicing tech stack, and it takes time because there's a lot of platforms and a lot of systems and it's very siloed. The good news is that it’s not complex. We don't need an Einstein to come in and try to map out how we're going to do this.”
The challenge, Sogorka added, is that for 50 years, all servicers had to do was send out a letter and collect money. Consumers had low expectations. But that changed quickly with new regulations and increasing consumer demand.
However, much of the underlying technology that the industry relies on is 50-60 years old. As the industry updates that technology, the process will improve for consumers and servicers.