If servicers hope to avoid repeating the costly missteps that took place after the 2008 Recession, they need to prepare now for an extended spike in a multitude of anticipated issues fueled by the COVID-19 pandemic, according to STRATMOR Group’s latest monthly Insights Report. The April report features the article, ” Walking the Tightrope: Servicing Through COVID-19,” which offers guidance to servicers on how they can best manage the host of pandemic-related changes advancing in the rapidly evolving marketplace.
The article notes that the servicing industry’s response to the 2008 financial crisis was largely reactive, costly and inefficient. Servicers hunkered down with manual processes, which amplified the blows of an escalating credit crisis and led to regulatory fees and reputational damage. “We can and will survive the time of COVID-19 by being smarter, more proactive and more disciplined with our response to the change in market conditions,” the authors write. “The decisions we make now will be with us for at least three and maybe as long as ten or more years – we owe it to our borrowers to apply the lessons of the past as we shape a better future for them.”
Even though servicers spent the past decade trimming staff as delinquencies declined, they’ll now need to add staff to handle an unprecedented spike in borrower inquiries and forbearance cases that may occur as borrowers emerge from forbearance. They may also need to add escrow staff to handle major disruptions in cash flows as well as annual escrow calculations and related communications with borrowers.
According to a recent MBA survey, the total number of loans in forbearance jumped from 5.95 percent in the prior week to 6.99 percent as of April 19. And at a recent PGR: MBA and STRATMOR Peer Group Roundtable meeting, mortgage servicers in estimated that peak delinquencies could reach levels between 15 and 20 percent, while some believed delinquencies will exceed 30 percent.
While warning that the worst of the financial fallout may be yet to come, STRATMOR Senior Partner Garth Graham says there is reason for optimism. “There are major differences between the current COVID-19 crisis and the previous recession,” Graham said. “A major upside to our current environment is that borrowers have more equity in their homes and average credit scores are higher. Also, there are far fewer ARM loans now versus 2007, so there is less of a risk of payment shock when rates rise at some point in the future.”
The report addresses several steps servicers should be taken now to reduce the current impact of borrower inquiries as well as future defaults. They include evaluating cash flow and liquidity risks within their portfolios, enhancing controls for compliance with new and existing regulations, developing retention options for borrowers, and understanding the use of legacy and emerging technologies that are available, among other steps.
“Proactive and rapid response for disruption response plans and requirements cannot be managed with a one-off approach,” said Michael Grad, STRATMOR Group senior partner. “Successful response planning relies on managing and integrating across line of business operations, technology, risk, vendors and project resources, which makes solving enterprise regulatory and business challenges difficult.”
In a second article, “An Originator’s Guide to COVID-19 Communications,” Mike Seminari, director of STRATMOR’s MortgageSAT Borrower Satisfaction Program, addresses the confusion surrounding how the pandemic is impacting the mortgage industry.
Seminari’s article offers advice and key messaging originators can use to calm and educate borrowers during the crisis. “Often, in the stress and confusion brought on by the quarantines and economic shutdown, a borrower’s first call for answers is to the originator who helped them with their loan,” he writes. “Rather than immediately suggesting the borrower contact their servicer, originators have a unique opportunity to go the extra mile by guiding their clients through questions and potential options in a scary and confusing time. This is how you build loyalty that lasts.”