In 2021, the impacts of COVID-19 on the mortgage servicing industry reach far beyond the forbearance mandates implemented in 2020. With the first round of federally mandated forbearances approaching maturity, banks and mortgage servicers face a potential wave of defaults they must manage, evaluate, and service as appropriate. As of January 17, 2021, 5.38 percent of all loans, or 2.7 million homeowners, are in forbearance. These figures do not include the approximately one million borrowers who did not qualify for a forbearance. Mortgage servicers must carefully assess and improve upon default servicing workflow management, call center ramp-up, and digital capabilities to meet pending changes in their portfolio outlook for 2021.
The following ‘Call-to-Action’ is intended to prepare servicing leaders and their organizations for the expected 2021 loss mitigation ramp-up. Traditional loss mitigation strategies – restructuring, forbearance, foreclosure – need enhancements to be effective going forward. Mortgage servicers must prepare for the operational and strategic impacts of current trends on their business. With a backlog of borrowers currently in forbearance, the potential drain on resources may be too overwhelming for mortgage servicers if they do not adequately plan their loss mitigation strategies.
The Case to Strengthen Default Servicing
Mortgage Servicing is in Transition
Mortgage participants entered 2021 after an economic shock in March 2020, in which employment spiked downward then climbed upward toward year end. Certain trends, such as historically low interest rates, declining origination costs, and an accommodative securitization pipeline, continued into 2021. As a result, mortgage servicers face 2021 with continued uncertainty about borrower repayment factors, including employment.
Forbearance Mandates Obscures Servicing Outlook
Mandatory forbearance disrupts servicers’ ability to assess liquidity and valuation, forcing portfolios to decline unexpectedly into 2021. In addition, borrower default forecasts are impacted by suspended default reporting, making conventional predictors like FICO less meaningful. Also, traditional loss mitigation actions are limited by the CARES Act, increasing the importance of monitoring mortgages as they exit forbearance and predicting borrowers’ transitions.
The CARES Act Impacts Servicers
As 2021 unfolds, mortgage servicers need an enhanced ability to monitor loan performance, given the dynamic of larger-than-expected forbearance volume and the potential for loans to default once out of forbearance. Rigorous monitoring of those loans in forbearance is required to appropriately plan for a potential spike in restructuring or foreclosure and their impacts on liquidity and valuation.
Recommendations for Mortgage Servicers
In 2021, servicing organizations should consider the following leading practices when evaluating their mortgage pipeline:
1. Review loss mitigation processes and workflows for inefficiencies
2. Leverage automation to increase efficiencies and productivity
3. Review staffing plans against real-time volumes
4. Consider approaches to alleviate call center constraints (e.g., invest in digital technologies with self-service options or consider outsourcing of staff and/or servicing functions)
5. Servicers should monitor percent net present value (NPV) versus mitigation option in anticipation of forbearance renewal
6. Loss reserves may be understated if current assumptions are used
7. Review servicing volume and forecasting for 2021 given recent market developments
8. Risk and reporting systems should accommodate uncertainty in projections into 2021
9. Key mortgage analytics to consider in refreshed reporting may include:
- Loan modification
- Recovery rates
- Curing success
Impact of Technology and Processes
For many servicers, today’s in-place systems are rigid and designed for stable and predicted changes. Mandatory forbearance and unemployment are driving unprecedented volume; this creates the need for a stochastic view not typically associated with Business as Usual (BAU) servicing. In addition, increased challenges in forecasting are driven by longer lead times in model management. At its outset, the CARES Act created some ambiguity in reporting requirements, which continue into 2021. For example, FICO scores are not updated with mid-prime mortgage holders most impacted.
Today’s servicing leaders have improved their organizations by utilizing analytics to increase performance. Analytics may be used to accelerate loan forecasting activities better to appropriately move mortgages through their lifecycle and increase P&L visibility. Analytics may also be used to deploy a standardized decision framework with a full audit capability across multiple portfolio variables, leading to new insights across newly defined portfolio segments. A customized interface with updated details may lead to quicker and better decision-making regarding loan outcomes, and a centralized platform for tracking all forbearance activities will benefit performance.
Successful servicers will be those who are best prepared to handle the pending loss mitigation activity ramp-up in 2021. Current strategies for loss mitigation will not be enough. Capco can help ensure that your servicing organization is well-prepared to meet these challenges. We have a team of mortgage consultants who understand the issues and risks and help optimize your servicing organization. To learn more, reach out to the following at Capco.