The unprecedented Covid-19 pandemic caught the world off guard and has hit humanity hard. It has been bad enough to trigger a global recession which would take a while to subside. The mortgage sector has been one of the worst-affected industries to be grappled with the business complications posed by the coronavirus. In the U.S., like anywhere else, homeowners are facing the worst time as they struggle to avoid featuring on the mortgage default list. But to the dismay of all, the coronavirus is now over a year old but the threats to the mortgage sectors have shown no real signs of abating.
Amidst the chaos and uncertainties, industry experts have found something peculiar and intriguing, some sort of pattern that might be useful in the current scenario. Industry insiders have noticed striking similarities between the Covid-19 mortgage challenges and the mortgage sector setback of the year 2008. It may sound surprising, even baffling to some, but there were similar effects on the mortgage industry some twelve years ago in the U.S when the financial system was hit severely. It was a result of the overleveraged financial institutions holding excessive exposure to mortgage instruments whose value had declined substantially. The current mortgage meltdown, similar to the 2008 mortgage collapse, involves opacity with respect to payments, with uncertainty as a key factor. Before exploring further to draw parallels between the two crises, assessing the current situation would help in setting up the required platform.
3 Major Challenges Facing Mortgage Lenders Today
Lenders are facing grave operational hardships which, if not addressed efficiently, can threaten the continuity of operations. The most concerning short-term problem facing lenders is their inability to scale the current contact-center operations to handle the high volume of customer inquiries. With the majority of the workforce working remotely from locations that cannot match the productivity setup of an office, there is a significant drop in the efficiency and effectiveness of contact-center operations. Also, transitioning the staff to work from home implies substantial technology investments (VPNs, cloud LOS solutions, etc.), hitting the already-plummeting bottom line. Consequently, defining options and eligibility for payment deferrals, administering large-scale programs and foreclosure procedures, and protecting against fraud are proving to be overwhelming for lenders.
A Distorted Product Shelf
Given the volatility of the market, lenders are unable to decide if they should continue lending and the way to determine the priority of their products. The rising risk on appraisal values that requires increased scrutiny is also creating logistical inconveniences during this period of restricted travel and people to people interactions. The industry is also facing the dilemma of whether to withdraw riskier mortgages, such as high loan-to-value mortgages, buy-to-let mortgages, etc., since it may limit their addressable market, affecting their business. One of the critical long-term mortgage loss mitigation challenges is to determine the products to re-introduce and the new products to explore.
Customer Service Concerns
Amidst the uncertainties and business challenges, it’s the customer who goes through the worst. Maintaining quality service levels across the value chain and addressing the massive flow of inquiries pertaining to mortgage payment deferral programs are giving sleepless nights to the industry leaders. Engaging in cash flow discussions with clients and borrowers under financial distress is also a tall order for the customer support team that’s working with reduced infrastructure capabilities. Unaware of the mounting pressure on the customer support teams, the borrower has pinned the high hopes on them even in the face of the catastrophe. For lenders, customer engagement cannot be compromised since it’s a determining factor in the success of their brand-building efforts.
Similarities Between the 2008 Challenges and the Current Mortgage Crisis
In the early 2000s, after a brief recession, house payments were carrying low interest rates. Consequently, more and more people with poor credit qualified for subprime mortgage loans with manageable rates, and they happily acted on that. Subprime lending refers to the provisioning of loans to people who are likely to face difficulty maintaining their repayment schedule.
These subprime borrowers caused the real estate market to skyrocket and people expected the sustenance of the growth. Housing prices were growing sharply, and the number of subprime mortgages was rising even faster. This created a temporary bubble in the market that caused the interest rate to rise from 2.25% at the end of 2004 to 5.25% by mid-2005. Finally, the bubble burst and the housing market crashed with thousands of employees getting redundant, individuals losing their lifetime savings, businesses filing for bankruptcy, and other terrible consequences.
This 2008 crisis crushed many recent homeowners who faced rising mortgage interest rates as the value of their homes dropped. As expected, they struggled to pay their mortgage as per the payment schedule and were also unable to sell the property without bearing a massive loss. As a consequence, the lenders foreclosed the houses, leaving the homeowners in ruins and turning many suburbs into ghost towns. The industry is facing a similar trend today with even borrowers with good credit scores struggling to adhere to their repayment schedule.
Losses for Lenders
By the time the houses were foreclosed upon, they had cratered in value, implying massive losses for lenders and investors. The value of the mortgage-backed securities also started to tumble. This forced many small mortgage lenders to shut down their business temporarily or permanently. Even the large players were left with no choice but adopt severe cost-cutting measures including trimming the workforce. Today, the scenario of the mortgage sector matches closely with what the world saw 12-14 years ago. Investment banks who are into the buying and selling mortgage loans that are being defaulted are failing, and lenders no longer have the capital to continue giving them out.
Following the 2008 disaster, the federal and state governments introduced immediate and long-term measures to mitigate the economic damage caused by the unprecedented crisis. But the relief packages were simply not enough for the stakeholders. While some institutions did get bailed out, others saw tough days ahead. As an aftermath, the government and the regulatory bodies introduced substantial changes to the compliance requirements for the industry and made the stakeholders more accountable. This naturally resulted in a shift in the hitherto operating methods of the lenders. Come 2020 and the mortgage industry, fighting a lethal virus, is looking at the government to bail them out. The US government has been trying hard to do whatever is within its reach, but everyone knows the limitations. The rest of the world is expecting the industry to do most of the hard work on its own and set an exemplary comeback for others.
Drawing on the Lessons of the 2008 Crisis to Fight the 2020 Evil
Today, the mortgage sector is desperate to pull itself out of the mess that’s threatening its survival. All eyes are on the industry leaders and they are being tested like never before. New operational methodologies are being tried, the latest technology and innovations leveraged, the workforce trained on the new normal, and aggressive cost-cutting ways explored. This is where the silver lining of the 2008 calamity is underscored. As lenders strive to manage the mortgage foreclosure affair, they should draw on their learnings from the last decade to come out of the maze.
The finance industry came to a standstill after the 2008 shock and it took several months for it to resume operations in the desired scale. The takeaway for the mortgage industry is that the wheels of the business must keep rotating even if the profits are low at present. To that end, lenders must offer mortgage payment deferral programs and similar relief measures so that the borrowers do not default on their payments and foreclosures can be avoided for as long as possible. Some governments and mortgage lenders around the world have already introduced three to eighteen-month payment deferral programs as a relief measure for the borrowers.
- Lenders can set a process for the borrower to demonstrate the true financial hardship of the latter to qualify for deferred payments.
- If the lender doesn’t want to write off the entire payment for the next few months, they can introduce provisions for the borrower to make interest-only payments.
- This will partly alleviate the immediate financial obligations of the borrower and prevent them from joining the payment defaults list in the short-term.
Adjust the Workforce to the Remote Work Model
Back in 2008-09, the internet was still a new concept for some businesses and work from home was only an IT-industry luxury. While the bigger players invested in the best technology to ensure the continuity of operations, others were helpless. Twelve years later, the coronavirus calamity has left humanity with no choices other than embracing the remote working model. As lenders have closed their physical branches and offices, they need a robust remote operating-structure with the necessary elements to enable employees to work from home efficiently.
- Remote working infrastructure comprises tools such as VPN access, laptops, required subscription to digital platforms, and the like.
- The employees need adequate training for a smooth transition and they must be equipped appropriately to support the growing customer requests.
- Lenders must invest in expanding the functionality and scope of their digital platforms to accelerate the throughput of customer requests, reduce costs, and cut down on human errors.
Enlist the Services of Mortgage BPOs
Though even in 2008, lenders weren’t hesitant to involve external mortgage services providers in their operations, the involvement was mostly limited to a few areas such as collections and customer support. Today, competent mortgage BPOs are well-equipped to handle the entire front-end and back-end operations range to assist the already stretched in-house teams of the clients. Lenders across the U.S. are realizing the benefits of having a few extra minds assisting their staff in navigating the overwhelming challenges thrown by the pandemic.
- With the outsourcing of loss mitigation services and back-office tasks, the client can focus on improving the relationship with their customers and prepare for the post-pandemic opportunities.
- Outsourcing reduces the lender’s dependence on the internal team, streamlines operations, accelerates loan processing, and boosts productivity, leading to enhanced customer satisfaction.
- The use of digital technology, such as AI, ML, and Analytics can be used to predict industry trends and drive analytics-based decisions in lending and pricing models.
Evaluate Portfolio Risk and Underwriting Policies
This is a critical factor the industry missed out on in its blunder of 2008. Lenders must prepare themselves for uncertainties by adjusting the terms of their underwriting policies and offerings in order to manage risks better. Some lenders have already started implementing changes to their appraisal and electronic closing procedures. They are also making appropriate policy adjustments to loan-to-value benchmarks and appraisal values.
- Going forward, lenders will have to embrace new ways of underwriting and adjudicating risks. To this end, using broader and non-traditional data types and adopting new modeling techniques would come in handy.
- Lenders must beef up their scrutiny and credit assessment methods. They must flag applicants who are likely to take significant unpaid leaves, and discount nonrecurring and commission-based incomes.
- Instead of the average of the applicant’s commissions over the last few months, lenders can ask them to show their income in the past 12 months for the debt-to-income ratio test.
The 2008 financial emergency was bad, but the 2020-version could be disastrous. Thankfully, there are a few ways out for the mortgage industry as it leverages the lessons of 2008 as anchors to see off this difficult phase. The points elucidated above, besides helping lenders in tackling the challenges of the virus, would also help them prepare for the exciting opportunities heading their way in the post-Covid world.
Who We Are and Why Our Expertise Matters
At Expert Mortgage Assistance (EMA), we have the right mix of subject-matter expertise and industry experience to help our mortgage clients manage a profitable business even during the ongoing adversity. By leveraging our custom mortgage services, our clients can efficiently handle the operational surge support requirements to realize higher productivity and deliver better customer service. Our offshore teams comprising multidisciplinary specialists and strategic mortgage advisers ensure round-the-clock mortgage processing and servicing to assist the client’s needs across the lending lifecycle.