In our last blog post, we covered the four standout challenges servicers faced in 2020.
With those challenges in mind, can we predict where the servicing industry is heading? While it’s impossible to answer that question without a bit of speculation, we believe three points can guide our thinking in the right direction: 1) the differences between what happened in 2008 versus today, 2) the impact of COVID-19, and 3) the post-COVID opportunities we anticipate will emerge.
The 2008 crisis versus today
Early government intervention and a strong market are two significant differences between today and the 2008 crisis. For example, through the CARES Act, the government helped alleviate the initial impact of COVID-19 on borrowers, granting relief options for federally backed loans, which about 70 percent of homeowners have at this time. Also, the mortgage industry is in a stronger position than it was in 2008. Before the pandemic, most banks had much healthier credit books, lower levels of delinquencies and foreclosures, and housing inventory and prices were at more favorable levels.
Another big difference is the technology available today that didn’t exist — or was only in its infancy — in 2008. Tools like automated valuation models (AVMs) have been around since the 1990s. Still, we can credit the more recent and rapid progress made in data science and machine learning as the catalyst for what we call the “AVM renaissance,” or the use of AVMs in more and more real estate valuation situations. For example, an AVM today provides a quick and cost-effective way for a servicer to value a pool of loans in a portfolio.
The trifecta of early government intervention and market differences, vastly improved technology, and the overall digital transformation of the 2010s makes the differences between the 2008 crisis and today’s situation more tangible. But what about when we include unforeseen global events whose impacts are still greatly undetermined?
The impact of COVID-19
The COVID-19 pandemic has had a considerable impact on the U.S. housing market. As the forbearance period nears its end, unemployment remains high, and economic uncertainty persists, delinquencies are predicted to rise to new levels. Thirty-day delinquencies are expected to peak at 14.2 percent in 2021, compared to a 12.1 percent peak in 2009 after the last financial crisis.
However, on the other side of the coin, 2020 can also be called the year of the refinance, with the year expected to wrap up with 90 percent more refinances than in 2019. The refinance surge prompted the Federal Housing Finance Agency (FHFA) to announce in August 2020 an “Adverse Market Refinance Fee,” which adds 0.5 percent to the total loan amount for refinances. There are some exceptions, but the fee was implemented December 1, 2020.
According to the FHFA, the fee is necessary to cover projected COVID-19 losses at Fannie & Freddie of at least $6 billion. To break down that figure, the losses expected are $4 billion in loan losses due to projected forbearance defaults, $1 billion in foreclosure moratorium losses, and $1 billion in servicer compensation and other forbearance expenses.
On the real estate valuation front, appraisals based on full interior and exterior inspections were unobtainable earlier this year due to social distancing requirements, paving the way for technology solutions to ensure the homebuying process continued to move forward. Temporary flexibilities to appraisal requirements allowed homeowner-enabled appraisal inspection tools to be used in the process, empowering appraisers to quickly request and receive interior appraisal information and photos from home occupants.
COVID-19 has installed more volatility into the market, and many servicers are looking for ways to gain more insight into their portfolios. In the current low-rate environment, mortgage servicing rights (MSRs) may lose value. Servicers typically offset this loss in value and reduce their risk in two ways: 1) sell portions of their portfolio to reduce the size of the asset, and 2) acquire and recapture loans through increased purchase and refinance volume. Having a good valuation partner in this situation is vital. Servicers should have the ability to quickly and proactively monitor portfolio risk so they can keep updated on the value of their portfolio, know which loans to sell to reduce risk, and understand which low-risk markets to focus on when they purchase more loans.
How can servicers prepare now for opportunities that may emerge in a post-COVID world? We believe the time has never been better to consider doubling down on digital transformation, especially related to the real estate valuation tech stack. By adopting more innovative, more digital real estate valuation solutions, servicers can mitigate risk through valuation precision, lower costs by using the right tool for the job, and improve their borrower experience by expediting what can be the longest part of the process.