With mortgage performance below pre-crisis levels, now is not the time to be ignoring the state of the default servicing industry – especially whether it stands ready to handle a wave defaults.
Is a wave of defaults expected? Not really. According to Altisource Portfolio Solutions’ latest State of the Default Servicing Industry report, the overall U.S. mortgage delinquency rate is at an all-time low – about 3.6%.
However, the company says it expects default rates for certain loan types – specifically FHA and private lender loans – to increase in 2020.
In the annual survey of 200 mortgage default servicing professionals, 90% said their organization currently services FHA loans. That’s up from 87% in 2018.
About 80% said they expect their FHA loan portfolio to increase over the next 12 to 24 months. That’s up from 72% in 2018.
About 85% said they expect the increase to be more than 25%. That’s up from 77% in 2018.
Separately, vendor performance is becoming increasingly challenging as portfolios shift to rural areas and as vendor pools for distressed loans and properties continue to diminish during this strong economic environment.
Nearly one-quarter (22%) of servicing professionals surveyed said their biggest challenge when managing vendors is vendor performance.
Seventeen percent cited costs and another 17% cited strategic alignment.
When evaluating a vendor to manage their default portfolio, 96% said property preservation and inspection is a leading consideration.
In addition, 95% pointed to end-to-end default disposition capabilities and 94% cited a strong marketing platform/marketing scale.
Due to the increasingly complex requirements around vendor management and vendor oversight, mortgage servicers are looking to vendors that can manage multiple pieces of the default lifecycle (i.e., REO asset management, property inspection and auction services) and that can seamlessly integrate with their current technology platforms.
About 94% of servicing professionals said their organization is likely to select a single-vendor approach to managing the default lifecycle.
About 89% of default servicing professionals report that they are currently using online auctions as part of their long-term strategy for asset disposition. That’s up significantly from 76% in 2018.
What’s more, 72% said they would like to do more online auctions. That’s up from 50% in 2018.
According to the report, online auctions have proven to be the best way to engage the broadest set of bidders and buyers because they allow bidders from all over the U.S. to easily engage in the auction.
Because of this, more bidders are ultimately participating and competing against each other, which produces higher bids for sellers than would be achieved offline where not all buyers in the market are participating.
“The survey uncovered many industry insights, including vendor management challenges and the importance of online auctions as a disposition tool,” says Patrick G. McClain, vice president, enterprise sales for Altisource, in a statement. “With historically low delinquency rates, we may see a higher rate of FHA defaults in markets experiencing economic turmoil with little housing liquidity, such as rural areas.
“In addition, servicers are using a single-vendor approach to manage multiple pieces of the default lifecycle to help mitigate losses and streamline efforts.”