Having built and led mortgage operations for nearly three decades, planning for the future stands out amongst the most challenging components a leader faces. Accurately predicting housing trends, mortgage rates, technology, elections, the impact of the broader economy , or how consumers will behave tests the best of us at some point in our career. The approach I find that positions us best is one I’ve used on many of my outdoor adventures: Prepare for all outcomes; or at least the most likely outcomes. The best way to do this is to understand your environment and assess the tools you have at the ready. So, as we approach mid-year, let’s refresh by answering 4 questions.
Today’s consumer looks a lot like pre-pandemic
First, how prepared are mortgage servicers for the next hardship cycle? In many ways, today looks and feels very similar to January 2020. The consumer and the economy have been on stable footing for several quarters, with many predicting a downturn just around the corner.
In January 2020, market consensus also indicated a healthy economy with concerns that the consumer was poised for weakness. What transpired was nothing like what we had ever experienced: the pandemic hit, and unemployment shot up to 14.8%. Uncertainty ran across all industries, impacting the simple day-to-day life for everyone. Our industry was no less impacted as concerns centered on the relationship between high unemployment and mortgage delinquencies.
Mortgage delinquencies spiked above 8% briefly but then quickly reversed thanks to smart, fast policy responses and strong execution from mortgage servicers. Technology also played a significant role in readiness, delivering hardship relief to consumers through an efficient and effective experience.
Policies included low-document forbearances and the ability to defer payments (by allowing forborne payments to be due at payoff or refi instead of increasing payments along the way). Since then, some pandemic policy responses, including payment deferrals, were made permanent.
Did we learn from this experience? Yes!
Learnings to leverage for the next cycle
Second question: Are we prepared to deliver a similar performance to provide fast and effective responses to hardship relief in the next cycle? Our history would indicate yes.
They say there is opportunity in crisis, and a crisis where millions suddenly – and mostly temporarily – couldn’t pay mortgages taught us valuable lessons.
Lesson 1: Give consumers and lenders the ability to act fast. The pandemic fast-tracked customer self-serve modernization so lenders could empower the homeowner while also managing compliance and investor risk.
Lesson 2: Align servicers, investors, policymakers, and regulators around consumer-first protections that deliver throughout the entire cycle. As noted above, key pandemic policies have been made permanent, due to the industry, regulators, and policymakers working together on systemically safe programming.
Lesson 3: Systems that power servicers must be flexible and operate in real-time to keep up with dynamic markets and regulations. This delivers capabilities to serve homeowners with the assistance they need to sustain homeownership and provide servicers the programming for timely and compliant actions.
These lessons on efficient response time, precise execution, and nimble technology bode well for our industry handling the next hardship cycle successfully.
Unemployment, delinquencies and hardships
This sets up our third planning question: Will the next hardship cycle be limited, or more protracted?
Strong employment generally aligns with well-performing mortgage delinquency rates, and both have been near record levels since the pandemic recovery.
Right now, the unemployment rate is hovering near 3.80% and MBA reports delinquencies at 3.94%. And while this is a great place to be, we’re also beginning to see signs of financial stress and fatigue from the consumer.
Much of the non-housing stimulus from the pandemic has run its intended course, and the Fed’s inflation fight is intended to put a strain on the job market.
So far, a sharp or protracted hardship cycle doesn’t seem likely. However, as discussed above, we must be prepared for all likely outcomes. One way our Sagent customers are doing this is by proactively contacting customers who’ve experienced strain in recent years.
This does three things:
- It goes a long way toward building trust with the homeowner.
- It helps get ahead of any potential hardships homeowners might experience.
- It helps servicers determine whether short-term or more complete loss mitigation hardship paths are required.
Homeowners who thrive in all economic cycles
A large population of homeowners will remain stable despite the volatility of the market. Whether or not we have changes in our political leadership, or if there is a shift in housing policymakers and regulators, the majority of the homeowners will continue making their mortgage payments and will likely want access to financial resources via their home.
On home prices, we can expect relatively low appreciation of 4.3% to 4.8% by year-end, per MBA and Fannie Mae respectively. This should help affordability for buyers without hurting owners.
It should also preserve the $11 trillion in accessible equity held by homeowners and give them the ability to address financial needs through their home.
They will do so in 3 ways: first-lien cash out, second-lien cash out, or a sale of the property, which will likely result in a new purchase.
So, a significant responsibility of mortgage servicers is caring for these customers who simply make their payments month in and month out. But without regular touch points or needing assistance, how can servicers ensure they retain these borrowers when the opportunity arises to earn their business again?
Servicers that provide homeowners with options to self-educate and self-serve at their convenience will be in the best position to win this business. This is the technology that the Sagent team is developing for our industry, one that provides real-time data across a unified end-to-end user experience that both supports and compliments a superior consumer experience.
