There is unquestionably a need for regulatory innovation across the broader mortgage industry, but none more pressing than de-risking the mortgage servicing space. Broad lessons were learned on how to curb predatory lending practices following the subprime mortgage crisis. Yet, financial stress exacerbated by COVID-19 put millions of households on uneasy footing, again.
Policymakers took bold steps to prop up the consumer economy, but the end of foreclosure moratoriums left many homeowners progressing toward default. Compounding matters, the sudden jump in mortgage rates has caused a 15-year-low on affordability.
Declining mortgage credit availability is bringing us to the brink of another crisis with potential to cause deep market distress. This time, though, if mortgage servicing relies on the tech sector to work together with regulators – instead of viewing them as obstacles to overcome – it can ensure a more stable future for the mortgage ecosystem and yield better results for us all.
The true benefit of quantitative easing
One of the loudest criticisms of late is that mortgage servicers never passed onto borrowers the true benefit of quantitative easing, and instead built in fees to cover costs. This might be true, but the causality can be directly traced to market inefficiencies participants have long known need to be addressed.
It’s especially important to focus on it now that Millennials, the largest population cohort in the U.S., have signaled an unwillingness to foray into homeownership in the near term. Stagnant wages, high levels of unemployment, inflation, and the sharp increase in long-term rates have created dual problems: high barriers to entry for first time homeowners and entirely unaffordable loan modifications for current borrowers. A looming recession has only served to weaken what little resolve 30-somethings have to aspire for homeownership, which will greatly diminish access to future generational wealth.
Understandably, the CFPB has been active lately, and rightfully so, considering the increased number of homeowners requiring loss mitigation strategies for their loans. Servicing supervision is essential to maintain public confidence in a market that has understandably garnered a large degree of skepticism, if not outright American distrust.
Without the transparency and uniform standards the regulatory agencies provide, competition declines and overall health of the market suffers as more Americans find themselves drowning in debt and looming foreclosures.
Have we prioritized the needs of investors over consumers?
Industry operations have historically prioritized the needs of investors — not consumers — and antiquated methods of loan servicing makes keeping pace with the increased need for assistance impossible. Direct costs of servicing rises rapidly as delinquency status becomes increasingly severe–the largest cost types being workforce and technology.
In the current model, lenders are left with two options: slow demand by adjusting the pricing higher via fees or hire more skilled workers (already a major challenge) to deal with the influx. Layering on more employees to keep pace with demand isn’t a sustainable solution and assessing borrowers already in financial hardship with excess fees to recoup costs is a violation of state laws, UDAAP practices and only serves to exacerbate the problem.
This is where fintech players can make a huge difference. According to Fannie Mae, only 1% of mortgage servicers consider their back offices to be fully digitized. That number is, quite frankly, generous. The ability to integrate consumer-protection regulations into digitally connected platforms will be what finally relieves the pressure on the servicing community and brings portfolios into re-performance. The most successful tech-focused servicers are the ones that are reimagining the front-to-back operating model and are doing so with regulatory body compliance by design.
Furthermore, regulatory scrutiny and enforcement must apply to the tech stack, itself. Technology solutions put in place during times of crisis ought to be subject to periodic evaluations. Reviews of data usage and the underlying technology should be required by regulators. And that’s something that we should all want.
There’s no doubt we’re in a challenging crisis of affordability. Policy makers have taken some bold steps in order to help prop up the consumers and the economy in the post-pandemic era, but there’s a lot more still to be done. We’re going to need smart, practical partnerships to guide us through the expected onslaught of operational rationalizations to survive in a contracting market. Embracing both regulatory guardrails and emerging servicing capabilities is the best way to land the industry on stronger, more efficient footing than ever before.
Nicholas Corpuz is the Head of Compliance at Brace.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.