PERSON OF THE WEEK: With delinquencies and foreclosures at pre-crisis lows, many mortgage servicers have – as would be expected – thinned out their default staff, which begs the question, how prepared will they be when the next wave of defaults arrives?
Default has always been a largely “manual” process, therefore, it requires trained staff. And if that trained staff is not readily available when a wave of defaults arrives, it obviously creates a huge problem for the servicer.
Yes, the default process does lend itself to some automation, particularly in the area of contacting borrowers in the early stages of delinquency. Most servicers have now invested in a default servicing platform and any supporting software, systems and services.
But a question remains as to how prepared most servicers really are when it comes to their default technology. Unfortunately, many mortgage companies don’t discover the true performance of their default software and processes until a wave of defaults actually hits.
To learn more about the risks mortgage servicers face in this current housing market – and how prepared they may, or may not, be for the events of tomorrow – MortgageOrb recently interviewed Janina Woods, senior vice president of private client services at Planet Management Group.
Woods has more than 25 years of experience in mortgage banking, with a special focus on default special servicing, portfolio management, client services and contract negotiation.
Q: What is the most prominent issue in mortgage servicing and special servicing?
Woods: The housing market has continued to improve nationally in recent years and borrowers continue to perform on their mortgage obligations, therefore reducing the immediate need for specialized default servicers.
With this cycle of change, people tend to re-market themselves leaving some servicing organizations with a lack of expertise to service re-performing loans (RPLs) and nonperforming loans (NPLS).
If default rates increase due to rising interest rates and/or softening of housing markets, mortgage servicers may again need more employees with unique skill sets who can perform customer outreach activity.
Another concern is the increased emphasis on having employees handle specific loan-servicing functions as servicing organizations grow larger. Staff can become entrenched in their servicing silos and finding people who have diverse skill sets can be difficult, especially when it comes to handling a loan cradle-to-grave.
Q: Do you have concerns about potential additional mortgage rate increases and if so, what are your concerns? If not, why are they not a concern?
Woods: Rising mortgage rates typically lead to less refinance activity and more defaults, although the economy is a bigger driver of default than an interest rate increase. Historically, whenever you see rates on fixed rate mortgages rise, you will see borrowers opting for adjustable rate mortgages. If you have a lot of ARMs in your portfolio, you can start to see payment shock issues.
Still, if defaults rise along with interest rates, big bank servicers will want to shed the defaulted loans from their books by turning to special servicers.
Also, loans and MSRs are going to stay on your books longer, have higher values and your refinance volume will slow. You need those MSRs to perform as well as possible to offset the volume decline. One way to “make hay while the sun shines” is minimizing losses. When rates eventually drop and you have to write down the value of your MSRs, it helps to have squeezed maximum value from the portfolio during the period when rates were rising.
Q: What has been the impact of recent disasters on default rates and how far reaching and long-lasting are the effects?
Woods: Recent storms such as Harvey have been a challenge for servicers. Not only must they set up outreach campaigns to assess which mortgagors in their portfolio were affected, they have to then contact those borrowers, and proactively get them on forbearance and/or work with them on insurance claims. People who are most affected by disasters are focused on finding safe housing and sorting out their job situation. As a result, disaster victims may not prioritize reaching out to their mortgage servicer
Servicers must determine if the collateral has been affected and work with vendors on getting into the affected areas. Post-Harvey, we talked to our vendors about using drones because the 50+ inches of rain that fell in 24 hours (the same amount they usually get in a year) was so devastating. What worked well for us was having specialized disaster teams in our call centers so well-trained agents answered the calls quickly. We monitored hold times and abandoned rates and adjusted staffing on the fly.
From an operations standpoint, there are many moving parts at both the portfolio and loan level. Analytics can tell you what portion of your portfolio is in the affected areas or who was delinquent before the disaster and who wasn’t but is now. At the same time, you’re working with investors and agencies on assistance programs.
Emerging from forbearance, servicers should determine if the borrower can make their payments or will need a modification, then decide which action plan will work best for the consumer.
Q: Defaults are at historic lows. What should companies prepare for now before default rates rise?
Woods: Most servicing operations are not prepared for the ever-changing and advancing technology in today’s world and may be behind the times when it comes to communicating with borrowers through social networks. Harnessing technology to reach borrowers where they are and how they want to be contacted will be key to success.
More borrowers are contacting us digitally. They’re using social media, text and email versus calling us or answering a land line. If a servicer is still spinning the telephone dial, it should get ahead of that by making sure it is compliant with TCPA and has the necessary permission to reach out via text or cell.
Q: What risks do mortgage companies take by not having measures to prepare for natural disasters and/or rising default rates? What measures can be taken to avoid these risks?
Woods:The two risks we must guard against are reputational and financial.
Poor loan servicing in the wake of a natural disaster puts you at reputational risk. When Anderson Cooper is interviewing a borrower standing in the ruins of their home, you do not want to be named as the company that wasn’t willing to help them during the crisis.
Financial risk increases when poor service delivery affects investors and borrowers, whether during a disaster or when default loans rise. In both cases, managing these key performance indicators (KPIs) can be facilitated using analytics and call campaigns
An important technique is to stay in touch with the borrowers to find out what’s going on with the collateral – otherwise you are driving blind and losing valuable time. In our business, excessive servicing time is where the greatest financial losses occur.
Q: What do you see happening (or not happening) in 2019 for mortgage servicers and special servicers? Give us your perspective on the most prominent issues for the coming year.
Woods:Slowing property values along with economic drivers can change market conditions and make it more difficult to sell REO.
Companies facing competitive pressures to move call centers off-shore must weigh the benefit of cost savings versus higher quality customer service and adherence to policies and procedures. The customer service rep’s ability to communicate and understand social attitudes is extremely important to us. Borrowers represent our biggest asset and acting in their best interest will strengthen our relationship when they contact us.
Consolidation will continue to grow larger players in this space. However, niche servicers still have special value-adds: sub-servicing, special servicing, RPL, NPL, small balance commercial and residential transition loans (fix-and-flip).
This is a great article. I would say from my own personal experience the housing market isn’t necessarily improving, but hitting a plateau. Servicers of default property are horrendous to deal with these days, and many in loss mitigation don’t even know or understand the default guidelines of the loans they are servicing. Also, things may have stabilized some, but many homeowners are still working 2 -3 jobs to keep up with bills, or have taken jobs for less pay, yet home prices increased. We still see a ton of default property. I fear we will hit that next bubble… Read more »
Janina raises some great points that the industry largely ignored or wasn’t prepared for during the last crisis. The effective loan workout specialist did have a unique skill set. The best were a loan processor/loan officer hi-bred that could handle high volume work loads while effectively communicating and educating the borrowers in default or where default was imminent. The industry seemed to just slide a lot of traditional customer service reps into that role and they were not equipped to handle the onslaught. If another crisis came on soon (and I don’t think it will if interest rates stay low)… Read more »