Mortgage loan default and delinquency rates remain at historic lows. In fact, the 4.42% share of US homeowners who were late paying mortgages in the first quarter of 2019 was the fourth lowest on record, according to the Mortgage Bankers Association.
The mortgage industry has made great strides since the crisis—investing in technology, enhancing existing tools and platforms, and increasing communication efforts to fortify sound, practical residential loan servicing practices to help better manage risk, maximize cash flow, and minimize defaults. These efforts have been deliberate and specific, focusing on early intervention and better ways to leverage technology in the process.
The evolution of these practices is ongoing. Today, banks and mortgage servicers are faced with a landscape characterized by changing regulations and increasing investor demands for transparency and accountability. So how can servicers continue to keep default rates low?
1. Leveraging Automation
Automated technologies can spot changes in loan and transaction performance sooner, ultimately providing earlier intervention for proper issue resolution and risk avoidance. Risk surveillance analysts use these technology platforms to monitor a breadth of mortgage activity and identify potential problems and risks before they happen. Providing this key information at the forefront of the process has been a major contributor to the decline in default rates.
These technologies are proactively becoming the kick-off to default communications that help loan servicers to—in real time—mitigate loss severity, increase return on investment (ROI), and strengthen the value of a loan portfolio.
Automated technology is also arming surveillance professionals with analytics and reporting. Some of these technologies create summary dashboards and scorecards focused on data such as delinquencies, losses and severities, prepayment speeds, default timelines, value declines, and analyst watch lists.
2. Improving Communication
Today, nearly all communication has gone digital, with borrowers managing much of their communication on their computers, smartphones, and tablets. They expect notifications about their loan in real-time, not via snail mail.
Better communication between servicers and borrowers has also allowed for faster application processing. Today, applications are being processed and decisions are being made within as little as five days. Borrowers are no longer reduced to waiting around to find out their next steps and are moving forward through the remediation process at a faster pace.
Not only is communication with the borrower key, it is important to have streamlined communication between lenders and servicers. Due to new regulations and checks-and-balances, innovations in database technology are now enhancing communication among lenders and servicers, enabling them to obtain, store and transfer data effectively and easily with each other.
3. Early Intervention
Automated surveillance and improved communication methods are making it possible for servicers to intervene as soon as a risk is identified. Servicers are able to contact borrowers using several communication channels to alert them that there is a risk of default.
A key part of this early intervention plan is to offer support and assistance by providing borrowers with their available options. Whether they opt for short-term forbearance, loss mitigation, a short sale, or anything else available to them, borrowers can choose the option that works best for their circumstances.
4. Embracing Regulation
One of the major post-crisis changes from the Consumer Financial Protection Bureau (CFPB) is the mandate to provide clearer messaging. Evidence suggests that the CFPB rules have successfully kept mortgage delinquency rates down and borrowers out of the hole.
One factor contributing to this lower rate is the CFPB requirement for servicers to provide borrowers with information about available loss mitigation options to avoid foreclosure. Servicers can continue to help their borrowers by embracing the guidance from this regulation—whatever the regulatory future holds—and providing clear information and resources to their borrowers.
Higher consumer financial confidence, historically low unemployment rates, and technology that improves monitoring and communication are all creating a historic opportunity to maintain low default rates for the foreseeable future. Of course, this will still require servicer vigilance and the willingness of all parties to communicate openly and transparently in order to eliminate the chances of returning to the high-risk era of a decade ago.