PERSON OF THE WEEK: The Mortgage Bankers Association’s (MBA) most recent Loan Monitoring Survey shows that the total number of loans in forbearance has been hovering at around 0.70% since December.
Now that the threat of a wave of defaults stemming from the pandemic has been averted and state and federal forbearance legislation has (mostly) expired, the question for mortgage servicers is how to adjust their business plans – including adjusting staffing levels in loss mitigation – while balancing compliance needs with operational efficiency. MortgageOrb explores this topic in an interview with Pete Pannes, chief business officer of Covius Services.
Q: Following a significant exit in forbearance, beginning in the third quarter of last year, the pace of both new forbearances and exits has pretty much stabilized and offset one another. This is good news for servicers, but you think it also creates new challenges, right?
Pannes: At one point in the height of the pandemic more than 8.9 million borrowers were in forbearance, according to the Federal Reserve of Philadelphia. By the third quarter of 2021, when the bulk of the early forbearances were due to expire, the pandemic was largely under control, jobs were back and the housing market was booming. Over the next three quarters the vast majority homeowners had successfully exited forbearance, many of them with modifications to their mortgages.
Some observers, like the MBA and the Philadelphia Fed, believe that means we have reached a floor when it comes to forbearance. This new normal, according to the Fed, has forbearances settling in at around half a million mortgages and around 2 million delinquent mortgages, with foreclosure starts around 30,000 per month. But, there is still significant uncertainty surrounding how both the remaining forbearance volumes and the impending economic climate will impact loan performance. While some of this could be a relief for the industry and borrowers, it has created a new challenge for servicers.
The Federal Housing Finance Agency (FHFA) has required servicers to be exceptionally diligent in ensuring that all options for modification are afforded to those unable to exit forbearance successfully. As that population stabilizes, servicers can attempt to dial-in their staffing and capacity for their teams that originate modifications. However, combine that with the unknown impact of a potential economic derailment and you have some significant uncertainty as a servicer as to how best to staff for a largely unknown population of modifications over the next 24 months. All this at a time when lenders are having to manage headcount in the face of eroding profitability and every part of a lender’s operation is under tight scrutiny regarding expense.
It’s easy to say reduce staff, but what happens if forbearance and defaults spike up and suddenly you’re subscale? It’s not something that a servicer wants to explain to regulators and/or the media. And it’s a very real challenge today.
Q: What are some of the other unknowns that are making staffing issues more difficult for servicers that might already be “subscale?”
Pannes: The state of the economy and what this might do to individual balance sheets is another big question. Some observers believe that a recession, or at least a technical recession, is coming. The un-knowables are when and how severe?
So, far job growth and strong housing price appreciation have tempered these concerns. But for how long? There is no question that higher interest rates have changed the economics of home buying in the last six months and put a damper on sales and new construction. Is this a pause or the beginnings of a housing recession?
Fitch just released a report warning that the “likelihood of a severe downturn in U.S. housing has increased” and projecting that in a worst-case scenario home prices could decline by 10 to 15%. At this point, however, the rating agency is still expecting a more moderate decline that could play out over the next two years.
These are all factors that servicers are considering as they decide their next moves
Q: How are different servicers dealing with this “damned if you do-damned if you don’t” situation?
Pannes: As you’d expect, we’re seeing different strategies at play with different clients. Some are still reacting to the Consumer Financial Protection Bureau’s warning about forbearance exists – not being prepared is not an excuse – and are maintaining additional staff just in case.
Others are trying to forecast exits and factor in the timing of a recession and downsizing or redeploying associates that are currently in the mod and default areas.
Some of the larger lenders are strategically outsourcing all, or parts of, the modification and default processes to Covius, and companies like ours. What this does, is give servicers more flexibility in staffing and the ability to shift fixed cost to fully variable one, while at the same time assuring the ability to fulfill modifications on demand. Outsourcing lets them redeploy staff without worrying about a short-term spike in forbearance mods. It also gives them confidence that they can handle higher levels of defaults in the event of a recession.
Obviously outsourcers can provide a range of options from end-to-end to more component based to relieve some of the production pressures servicers face when required to provide modifications to their borrowers.
Q: Aren’t large servicers concerned about exposing themselves to compliance risks, if they outsource mod and default activities? How to do you address their concerns?
Pannes: Absolutely, at the end of the day, the servicer and the end-investor are still responsible for how their customers are treated in the modification and default processes. So, the upfront and ongoing due diligence processes in selecting an outsourced partner are extremely rigorous.
Engaging a firm that provides a significant level of experience in providing compliant processes is key. The production of both trial and final modifications have very specific performance standards involving timelines, document chain of custody and score-carding against monthly requirements.
The deployment of a dedicated team with client-specific continuity, first-hand relationships with regulators and adherence to information security standards are minimum table stakes for an outsource provider when taking on the modification process for a servicer.