Distressed servicing costs set to rise in 2023 ?
How will mortgage delinquency trends impact servicers in 2023, once the forbearance period ends ?
We just wrapped up our visit to MBA’s Servicing Solutions Conference & Expo 2023 and latched up a bunch of insights from the best minds in the servicing industry.
In this week’s newsletter, we will explore how the post forbearance market could shape delinquency & foreclosure trends.
More importantly, how it could affect the cost of servicing operations. Here’s what’s inside:
Analysts & experts see a rising trend in mortgage delinquency & foreclosure starts. Although, these numbers aren’t alarming right now, we must track them through the latter part of 2023.
There’s a growing shift in delinquency drivers that hints at financial distress creeping into borrowers, mainly due to job cuts & moderate recession.
This could be a red-flag for servicers as CFPB could push for extensive loan modification work-arounds to continue beyond forbearance roll-back.
Servicers could experience a downward pressure on their portfolio profitability due to possible rise in distressed servicing costs in 2023.
Here’s a complete low-down 👇
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Mortgage delinquency is on the rise after two years of cool down
Mortgage delinquency has an interesting love-hate relation with the servicing industry. While it remained subdued for large part of 2019 and 2020, there are signs of delinquency resurgence that could be a cause of worry for servicers in 2023.
As of fourth quarter of 2022, delinquencies were up by 51 basis points from their all time low of 3.45% as reported in third quarter. The National Delinquency Survey reported 3.96% of all outstanding mortgages on a seasonally adjusted basis were delinquent on 90 day basis for the quarter ended Dec. 31, 2022.
Interestingly, delinquency increased across the stages - 30 days delinquencies increased by 26 basis points, 60-day late payment rose by 13 basis points and 90 days arrears grew by 11 basis points.
If we look at delinquencies across product types, then FHA loans stood as the single largest driver of delinquencies. FHA loans alone contributed to 10.61% of delinquent servicing portfolio volume, followed by VA loans.
The question is what are driving delinquencies in the post pandemic economy.
A shift in delinquency drivers: Reading between the lines
According to a FHFA report, majority of consumers still cite national emergency declaration as the major reason of falling behind their payments. However, this concern is falling into shadows, as new delinquency drivers arrive on the scene.
In fact, COVID induced financial stress as the leading reason for payment delays came down from 73% to 58% in FHFA latest report. During November 2022, the second most cited reason was curtailed income - which grew from 5% to 7%.
The share of delinquent borrowers with excessive debt, personal or family illness or unemployment has risen to 3% in each category. Emergence of new delinquency drivers tells us that, with pandemic relief being phased out, economic conditions like the gap between wages and the cost of shelter are slowly putting pressure on loan performance.
This could be a warning sign for mortgage servicers because historically, unemployment has been correlated with delinquency trends.
Even though the unemployment rate fell to 3.4% for January, the MBA expects that to rise to 5.2% by the end of the year as hiring slows. That means going forward in 2023, delinquencies could grow in tandem.
Keeping this mind, CFPB expects mortgage servicers to continue offering a range of ongoing loss mitigation options to consumers who are experiencing financial hardships even if they are unrelated to the pandemic.
Anticipating financial distress on consumer’s part, CFPB has invoked “temporary flexibilities” in its servicing rules. Under this CFPB can extend special foreclosure protections for delinquent borrowers to protect them from financial hardships during an imminent recession. It is likely to direct mortgage servicers to extend loss mitigation programs forbearance, streamlined deferrals, loan modifications etc to distressed borrower even if they have nothing to do with COVID.
In a nutshell, in the current high interest environment, mortgage servicers should prepare for higher operational costs that could emerge from rising delinquencies and revised loss mitigation guidelines from CFPB.
Could distressed servicing costs rise in 2023 ?
According to Mortgage Banker Association’s latest numbers released at Servicing Solutions Expo, the cost of servicing non-performing loans are already back to pre-pandemic levels.
Distressed servicing costs rose from $1,226 in 2020 to $1994 per loan in first half of 2022. This is comparable to non-performing loan servicing costs in 2019 - which stood at $1,960 per loan.
This boomerang in distressed servicing costs is not completely unexpected.
The servicing costs for non performing loans was temporarily muted due to pandemic related forbearance & loss mitigation relief measures. However, as these are being eventually rolled back, we see an uptick in early delinquency & foreclosure starts.
"We're not seeing a lot of stress in the mortgage system right now, in terms of delinquencies but there are some early indications that they are rising” - Mike Fratantoni, chief economist and senior vice president at the MBA, said at the Servicing Solution conference in Orlando, Florida.
According to an estimate by CoreLogic, 90 day delinquency including foreclosures will increase from 1.2% to 2% by end of 2023. Given these trends, there’s always a possibility that CFPB could enforce servicers to continue loss mitigation program beyond the roll-back of national forbearance in May 2023.
These developments could push up the cost of servicing for distressed loans beyond $2000 per loan in second half of 2023.
With Fannie Mae predicting a modest recession in the current year, the interest rates could soften a bit by the end of 2023. According to Mortgage Banker Association, we could end up somewhere around 5.3%.
This will provide much needed relief to home-owners who borrowed at higher interest rates last year but won’t help those distressed borrowers who got loans when rates were at record lows during the pandemic.
Thus mortgage servicers should prepare themselves to flex muscles that haven’t been used in a while around - default servicing, foreclosures and high touch customer support services. As we move in to second quarter of 2023, we will have more visibility on which direction the wind is set to blow.
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