In nearly three decades of building and leading a mortgage business, planning for the future is one of the most challenging components a leader faces. Accurately predicting housing trends, mortgage rates, technology, elections, broader economic impacts, or how consumers will behave tests the best of us at some point in our careers. The approach I’ve found works best for us is the one I’ve used on many outdoor adventures: Be prepared for all outcomes; or at least the most likely outcomes. The best way to do this is to understand your environment and evaluate your existing tools. So, as we approach mid-year, let’s review 4 questions.
Today’s consumers look a lot like pre-pandemic consumers
First, are mortgage servicers prepared for the next difficult cycle? In many ways, today’s situation is very similar to January 2020.
In January 2020, market consensus also showed that the economy was healthy, but there were concerns that consumers might be weak. What happened was completely different from what we have experienced: the pandemic hit and the unemployment rate soared to 14.8%. Uncertainty pervades all industries and affects everyone’s simple daily lives. Our industry has been affected by concerns about the relationship between high unemployment and mortgage delinquencies.
Mortgage delinquency rates briefly spiked above 8% but then quickly reversed due to smart, quick policy responses and strong enforcement by mortgage servicers. Technology also plays an important role in preparation, easing difficulties for consumers through efficient and effective experiences.
Policies include low-doc deferrals and the ability to defer payments (allowing deferred payments to be made as you repay or refinance, rather than increasing payments along the way). Since then, some pandemic policy responses, including payment deferrals, have been made permanent.
Have we learned from this experience? Yes!
Lessons learned for next cycle
Second question: Are we prepared to perform similarly in the next cycle to respond quickly and effectively to hardship relief? Our history shows yes.
They say that within crises lies opportunity, and that the crisis in which millions of people were suddenly — and mostly temporarily — unable to pay their mortgages has taught us valuable lessons.
Lesson 1: Empower consumers and lenders to act quickly. The pandemic has fast-tracked the modernization of customer self-service so lenders can support homeowners while managing compliance and investor risk.
Lesson 2: Align service providers, investors, policymakers and regulators around consumer-first protections to deliver services throughout the cycle. As noted above, key pandemic policies have become permanent as industry, regulators, and policymakers work together to plan for system safety.
Lesson 3: Systems that support service providers must be flexible and up-to-date to keep pace with dynamic markets and regulations. This provides the ability to provide homeowners with the assistance they need to maintain homeownership and provides programming for timely, compliant actions by service personnel.
These lessons about efficient response times, precise execution, and flexible technology bode well for our industry to successfully navigate the next difficult cycle.
Unemployment, debt arrears and hardship
This raises our third planning question: Will the next difficult period be limited or longer?
Strong employment generally coincides with well-performing mortgage delinquency rates, both of which are near record highs since the pandemic recovery.
Currently, the unemployment rate is hovering around 3.80%, and MBA reports a delinquency rate of 3.94%. While it’s a great place to be, we’re also starting to see signs of financial stress and fatigue among consumers.
Most of the non-housing stimulus measures brought about by the epidemic have achieved their intended purpose, and the purpose of the Federal Reserve’s crackdown on inflation is to put pressure on the job market.
So far, a sharp or prolonged cycle of hardship seems unlikely. However, as mentioned above, we must be prepared for all possible outcomes. One approach our Sagent clients are taking is proactively reaching out to clients who have experienced stress in recent years.
This does three things:
- This goes a long way in building trust with the homeowner.
- It helps overcome any potential difficulties a homeowner may encounter.
- It can help servicers determine whether a short-term or more complete loss mitigation path is needed.
Homeowners who thrive in all economic cycles
Despite market volatility, a large number of homeowners will remain stable. Regardless of whether our political leadership changes, or whether housing policymakers and regulators change, most homeowners will continue to pay their mortgages and likely want financial resources through their homes.
In terms of home prices, we expect home prices to appreciate at a relatively modest 4.3% to 4.8% by the end of the year, according to MBA and Fannie Mae. This should help affordability for buyers without hurting homeowners.
It should also preserve the $11 trillion in available equity held by homeowners, allowing them to meet their financial needs through their homes.
They will do this in three ways: a first lien cash-out, a second lien cash-out, or a sale of the property, which may result in a new purchase.
Therefore, an important responsibility of mortgage servicers is to take care of these customers who make their monthly payments. But without regular points of contact or need for assistance, how can servicers ensure they retain these borrowers when the opportunity to win business again arises?
Vendors that provide homeowners with convenient self-education and self-service options will be in the best position to win this business. This is the technology the Sagent team is developing for our industry to support and complement a great consumer experience by delivering real-time data in a unified end-to-end user experience.
