The housing industry has been on a wild ride for the last few years. It went from a frenetic sellers’ market that was unlike anything before in terms of incredibly high price points and crazy bidding wars, to where it is today – a tepid buyers’ market that is struggling to keep its head above water, with historic rate hikes, inflationary pressures, and lackluster housing inventory. So far in 2023, there is some optimism. Rates have come down a little, and as of press time, applications have been up for a few weeks. Most will agree, however, that 2023 is going to be a transitional year marked by uncertainty. Which begs the question: How will mortgage servicing be impacted this year? Industry experts are keeping a close eye on several emerging trends.
First, there is the continued need for an enhanced borrower experience via digitization. The sector has been immersed in this transformation for some time now and it will continue to evolve as new technologies make their way into the intricacies of the mortgage servicing process. HELOCs are having their moment as homeowners are increasingly turning to them to tap into their equity. At the same time, the MSR market is still very active as high rates have forced many lenders to sell the servicing of their loan portfolios to raise capital. MSR investors, in turn, are finding they need smart subservicers that can deliver a great customer experience while properly managing regulatory scrutiny. All of this is creating a growing need for complete data transparency within servicing portfolios. Finally, with the financial stress inflation has brought to bear on American households, servicers will have to monitor and manage default activity more closely to stay a step ahead of it as the year progresses.
Before examining each of these trends in greater detail, let’s first consider how rising rates are impacting loan portfolios.
The Impact of Rising Rates
Rates are volatile and widely expected to increase even more, so the shift of loan servicing from lenders to investors and/ or servicers and subservicers is taking hold – though inbound and outbound portfolio movement is largely out of the servicer’s control and is very dependent on client base composition. The hot MSR market has also given rise to a new client base for servicers, namely, investors who have raised capital to invest in MSRs.
Pre-payments are currently quite low and refis have all but dried up – but delinquency rates are holding – at least for now. Additionally, the number of homes underwater is beginning to increase. In fact, as of December 2022, of all the homes purchased with a mortgage last year, 8% were at least marginally underwater and nearly 40% had less than 10% equity stakes in their home.1 So it is clear – the rapid rise in rates is being felt everywhere.
Trend #1: Borrower Experience Will Continue to Improve
The digital journey for borrowers is expanding across the entire loan life cycle. The good news is today’s technologies are helping lenders stay in front of customers for cross-sell, recapture, and retention purposes. And for those who are seeking home financing, these technological advancements offer greater convenience and personalization.
LoanCare’s website for homeowners is a good example of this. The site is designed to allow for self-service – an essential component of a satisfying online journey. Rather than calling in to submit a claim for a natural disaster, LoanCare’s website allows homeowners to easily complete the entire process online. It also features personal tax data and tips, so clients don’t have to search elsewhere for the information they need when tax time rolls around. There is a comprehensive Q&A section as well that was created to proactively address homeowners’ questions. With these digital enhancements, homeowners don’t have to resort to placing calls or conducting Google searches to get the answers they need. They are literally at their fingertips.
Trend #2: HELOC Demand Will Rise
HELOCs are resurging in popularity. Consider these statistics:
- Purchase originations are projected to be just over four million in 2023 – almost half of recent year totals (7.4 million in 2020, 8.0 million in 2021).
- Refinance originations for 2023 are estimated at a historical low of just over one million.
- Tappable home equity is expected to decrease by 6.5% YoY from $19.4 trillion in Q4 2022 to $18.1 trillion in Q4 2023. This decrease is expected to be a result of decreasing home prices and falling balances due to pay-down rates.
- Nevertheless, home equity originations are expected to increase by 24% in 2023.
- Delinquencies are expected to increase to 1.4% by the end of 2023,which is still well below pre-pandemic levels.2
For these reasons, it’s more important than ever that your subservicer has a comprehensive understanding of the special nuances involved in servicing HELOCs. For example, LoanCare has a dedicated HELOC servicing group that specializes in this area. They know exactly what’s required to manage disbursements, ensure interest calculations are accurate, and set up HELOCs correctly when the loans are onboarded.
Trend #3: MSR Market Will Remain Active
A substantial supply of MSR is currently available and it should stay that way throughout 2023. Some independent, non-bank mortgage companies that have large MSR holdings are facing very challenging times and will need to create liquidity through the valuable servicing assets they hold. We may also see large financial institutions looking to pare down their own mortgage portfolios
As the market increasingly turns to subservicers to help manage these assets, they should take care when vetting a potential partner. Some items to consider for ensuring smooth portfolio transitions:
- Inherent trust in the servicing partner and process
- Deep, proven servicing experience
- Complete portfolio transparency that enables quick, confident investment decisions
- High ratings from credit agencies (Moody’s, Fitch, Standard and Poor’s, Kroll)
- High ratings from GSEs (Ginnie Mae, Fannie Mae, Freddie Mac, HUD)
A strong MSR subservicer, like LoanCare, will already be servicing on behalf of portfolio investors with years of proven experience in effectively managing servicing transitions and understanding all the special nuances involved including the ROI-based KPI tracking. Essentially, you need a subservicer that has the operational, regulatory, and financial infrastructure to support this servicing sector – and support it well.
Trend #4: Complete Data Transparency Will Grow in Importance
In a dynamic market such as this one, it is especially important for lenders and investors to have unprecedented insight into their mortgage portfolios. Lenders should be able to easily and quickly see where there are revenue opportunities (upsell/ cross-sell) and risk (both financial and regulatory). MSR owners need to have a thorough understanding of their ROI. To access these insights, lenders and investors will look for on-demand portfolio management solutions that offer unparalleled transparency such as LoanCare Analytics™.
LoanCare Analytics is a proprietary platform that offers real-time access to servicing insights by aggregating performance metrics and data points from a variety of functions and departments. Stakeholders can easily:
- Track progress through the entire lifecycle of a loan (onboarding, bankruptcy, etc.)
- Monitor performance metrics in real-time
- Mine for leads
- Simulate mock regulatory audits
- Filter data output with 360-degree visibility
Using interactive visualization and intuitive filtering, LoanCare Analytics provides real-time, actionable insights that facilitate immediate decisions and long-term strategy development.
Trend #5: Default Activity will be Closely Watched and Managed
While unemployment numbers remain low, we have seen certain industries suffer job losses, and inflation remains a real concern. When the economy takes a significant downturn, defaults inevitably start to climb.
According to TransUnion, the rate at which borrowers have been consistently late on their mortgages is on track to increase by half a percentage point this year. The 60-day-plus delinquency rate will rise to 1.4% by year-end from an estimated 0.9% in 2022.3
Lenders will need to prioritize portfolio monitoring to identify warning signs. This is when working with the right subservicer – one that ideally has a dedicated team such as the Velocity Specialty Servicing division of LoanCare pays dividends. Velocity has invested in the specialized talent, incentives, and SLAs tailored to the specific objective of turning distressed loans into performing portfolios faster.
In fact, all of these trends point to the importance of partnering with a subservicer poised to handle the servicing complexities that go hand-in-hand with a dynamic market environment.
Ideally, seek out an experienced, one-stop-shop subservicer with a robust risk and compliance infrastructure – and is equipped to handle the regulatory scrutiny that comes with the territory. Communicating regularly with partners and sharing extensive reporting, data analytics and actionable insights are also critical. As the industry adapts to the new reality of 2023, it’s important to look for a subservicer that can protect the value of their customers’ assets by investing in technology to modernize the servicing business through innovation. The bottom line? Subservicing partners such as LoanCare can help maximize returns and minimize risks in a collaborative and transparent manner as these emerging trends make their mark on the industry.
Rodney Moss is Executive Vice President, Strategy and Business Development at LoanCare. Rodney leads the continued growth of LoanCare’s portfolio of strategic subservicing relationships. In addition to leading business development efforts, Rodney also directs product strategy for the organization leveraging his more than 25 years of experience in the financial services industry.