REQUIRED READING: It is no secret that the mortgage servicing industry suffers from an unpopular reputation. In too many cases, consumers are fed up with their mortgage servicers, and they are not being quiet about their displeasure: Complaints and bad press abound regarding dismal customer service, modifications that stalled for months and ended in denials, credit scores that plummeted even when payments were made through approved modification plans, and wrongful foreclosures.
What may be new, however, is the way the industry responds to these complaints. A radical change is coming, and it will be driven by borrowers.
The current response to borrower complaints has been a slew of laws and regulations designed to protect consumers, including the Dodd-Frank Act. Are consumers willing to accept these changes as a solution to the problem, or do they want more?Â Â
Upcoming generations of borrowers will want much more from the industry, including the right to select which company ultimately services their mortgage. If you think that's not possible, consider this: In the early 1970s, lenders and title companies, along with the Realtor community, worked together to control which companies would handle the title and closing on loans. Many developed relationships that created a stranglehold on the title and closing business, with many lenders and Realtors getting a kickback from these referrals. To address that situation, the Real Estate Settlement Procedures Act (RESPA) was created.Â
One of the key requirements of RESPA is that borrowers have the choice of selecting the title company and/or closing agent for their mortgage closing. This regulation took the ability to control closed loans away from the lenders and has resulted in numerous loan closings being conducted by attorneys or closing agents who have limited knowledge of how closings should be conducted to avoid post-closing problems.Â
While most lenders have come to assume that there is no limitation on which agent a borrower can choose, the reality is that a lender can limit the borrower to three approved options in the borrower's area. So if it can happen to lenders, why can't it happen to servicers?
Unlike just about every other financial dealing today's consumer has, borrowers don't have a say regarding which company will ultimately collect their monthly mortgage payment and administer their escrow account. Viewed another way, there's very little incentive for mortgage servicers to provide awesome customer service. If consumers are unhappy, their only option is to refinance, which can be a time-consuming and costly undertaking.
But the upcoming generation of consumers is an Internet-savvy group, and one that researches and comparison shops just about everything. The Baby Boomer generation may have been content with the lender dictating their servicer, and with merely receiving a notification letter when the servicer is changed. But Generation X and Generation Y consumers – the primary borrowers ahead on the horizon – have already shown that they are not willing to accept the status quo when it comes to their finances or lifestyle options.Â
The Generation X demographic encompasses 50 million people born between the mid-1960s and 1980. They have a strongly self-reliant mentality, value a well-structured work and life balance, and are less inclined to accept at face value that a lender knows what they need from a servicer.
Along with a pragmatic approach to what they want and how to get things done, this generation has a keen technological acuity. They use technology to accomplish numerous everyday tasks, while still having time to spend with their children and extended families.
Generation Y is composed of the 72.9 million people born between 1980 and 2000, and this group is just beginning to emerge as potential home buyers. The largest demographic bloc since the Baby Boom generation, Generation Y equals one-third of the nation's total population. They will likely be the largest population ever to purchase homes, leading a tidal wave in trends and buying power. They constitute a sophisticated group in terms of technology, and one that participates in today's social media outlets.
But there is a downside to a heavy reliance on technology for social outreach. Depending on technology for many of their social and business interactions means Generation Y will have a void of personal communication skills, and will be less likely to seek face-to-face contact when doing business.
The impact on servicers
It is certainly conceivable that in the not-too-distant future, borrowers will demand to have a choice and a say in which company services their loan. For Generation X, the need for more control will be the driver. Generation Y will look to have their loans serviced by a familiar consumer group, such as their current bank. Or, they may want a specialized servicer for a specific mortgage product, and they may seek a servicer with a relationship to their mutual fund or other investment vehicle so they may pay their mortgage directly from their investment returns.
There is also the possibility that loan products will change to allow borrowers to make payments based on their own cashflows, rather than a standardized payment schedule. These changing products dictate that servicing be able to accommodate fluctuating payments. This, in turn, will allow consumers the option of finding which of the servicers is best at handling those specialized products and select that one to service their loan.
In this scenario, servicers would end up competing against one another for business, just like loan production offices do today. The customer's satisfaction would likely supersede the investor focus that servicers have today.Â
Clearly, the primary focus would be on consumer service. The single point of contact (SPOC) protocols would be the most critical element of any type of person-to-person contact. Customer representatives would be trained to understand the general servicing process while being able to help borrowers make decisions on things like refinancing.
The customer representatives in this future scenario would also be able to educate borrowers about prepayment penalties, loss mitigation options, tax payments, and the calculation of the next principal-and-interest payment for adjustable-rate mortgages. Customer representatives would understand the ramifications of legal documents and regulatory requirements so they could answer any question that a borrower might ask.Â
The right technology will undoubtedly be critical in attracting business from both Gen X and Gen Y. Servicing programs will include electronic reminders to borrowers about payments due, payments made and outstanding principal balances. If the payment is late, a reminder notice will be sent immediately via a tweet or an email, not via the snail mail used today.Â Â
Customers will expect that because they have their servicing with one of their liquid asset funds, the payments will be automatically drawn from their accounts without all of the automated clearinghouse issues experienced today. The expansion of the ‘digital wallet’ will identify, based on the borrower's cash usage, when it is best to make the payment.
Such programs as automated analysis of current rates and refinance options would be de rigueur. And both automatic alerts to borrowers about potential refinance opportunities that enable a refinance with the click of a mouse and e-signatures would be customary.
A new generation
Indeed, the world of mortgage lending and servicing could take a dramatic turn in the coming years. Imagine this: Upcoming generations may expect that if a drop in rates is seen on Monday, they will receive an electronic notification and, with a simple click of an ‘accept’ button, be able to have the loan refinanced to a lower rate by Friday – without ever talking to a person or going to an office to sign papers. No unnecessary documentation would be required.
Collection calls could become passÃ©. Landline telephones will be rare in the home, and a response to a collection call will be even rarer. Servicers will need to develop new methods for reaching out to borrowers.Â
Consumers will expect to see that the payments have been made through advisories sent via email or texting. Underfinanced escrow accounts, taxes paid to the wrong taxing authority or payments that are not received by insurance companies – unfortunately, all too common today – will not be tolerated by consumers. That is because borrowers will be electronically connected to tax departments and insurance companies, and will know immediately that an error has been made.Â
With the authority and control firmly in the hands of the consumer, what, if any, will be the role of the investor? Most likely, investors will benefit. Redesigned technology that supports a more efficient front-end administrative and functional process means that fewer loans will default. Loans will be identified early on as potential defaults and will get the individual attention and support needed for them to be cured.Â
While the return on investment of a mortgage-backed security will fluctuate with the greater ability to refinance, investors will have much more confidence in the information on loans when making decisions about securitizations. For the servicers themselves, the changes in consumer support and the enhanced role of technology will restructure their costs and create new opportunities for higher margins of profit.Â
Picking and choosing
If consumers have a choice in servicers, how will they know which one to pick? The obvious answer is to have a rating system for servicers based on the results of the functions they perform. Today, the servicer rating methodology conducted by rating agencies is very subjective, with little focus on meeting the needs of consumers, and provides little value to a borrower interested in comparing servicers.
It is easy to envision a set of operational risk measures that will correlate to the performance expected by consumers. Included will be things such as the frequency of default prevention, borrowers' satisfaction with the information provided when they reach out to their SPOC, and the success of technology programs for refinances. While these measures have been widely discussed, they haven't been embraced by the industry.
A more efficient servicing industry – in which the players compete for consumers' business – is good for everyone, investors included. And a new rating system that ranks servicers based on objective criteria relating to key performance metrics, including customer service, will not only be expected by consumers, but demanded.
The mortgage business is often slow to change. In this case, servicers have no choice but to adapt or risk being phased out. Upcoming generations of borrowers will not settle for someone else dictating who services their mortgage payments.
It may not be the way that the industry is used to doing business, but in the near future, it could easily be considered as the new normal.
Rebecca Walzak is president of Looking Glass Group LLC, a consulting firm focused on business transformation initiatives in the financial services industry. She is also president of rjbWalzak Consulting, which provides consulting services in quality control, regulatory compliance, and operational and enterprise risk management. She can be reached at (561) 459-7070.