This piece originally appeared in the November 2022 edition of MReport magazine, online now [1].
As we approach the end of 2022 and the dawn of a new year, the mortgage and housing industries are facing several headwinds. The refi boom of the last few years has dwindled in the face of repeated Fed interest rate hikes designed to combat runaway inflation (as of this writing, the Fed has just announced another 75-basis-point hike, the sixth of the year).
That one-two punch also has many potential homebuyers reconsidering a mortgage or, at minimum, waiting for home prices to drop further to help account for the higher mortgage rates they’re currently facing.
Following the Fed’s latest hike announcement, Michele Raneri, VP of U.S. Research and Consulting at TransUnion [2], noted that “In the mortgage market, consumers who may otherwise be considering buying a home may choose to continue to hold onto their down payments, waiting to see if interest rates and/or home prices decline in the not-too-distant future. For those consumers who do purchase a home, adjustable-rate mortgages may continue to be more popular among consumers seeking lower monthly payments in the short-term.”
For some companies, decreased volumes mean tightened budgets or reductions in staffing, with several prominent lenders having announced layoffs in recent months.
A late-October blog post from Fannie Mae SVP and Chief Economist Doug Duncan [3] noted that the GSE’s recent surveys of mortgage lenders found companies reporting that back-end operations staff is the top driver of current cost impacts when it comes to originating loans, followed by compliance/legal costs and loan officers. On the other end of the spectrum, back-end process technology and consumer-facing tech were cited as the top drivers of cost reductions.
The industry, it seems, is in another moment of transition.
With that in mind, MReport recently spoke with a cross-section of mortgage industry lending and vendor executives to learn what victories they’re hailing from 2022, what challenges they’re rising to meet in the new year, and how these moments of transition can also prove to be moments of opportunity.
Nathan Bossers, President, Boston National Title
One of the topics your company is navigating right now is educating about the risks to lenders and servicers if attorney opinion letters end up replacing title insurance. Could you unpack that for me?
Bossers: Sure, there are a lot of different risks, and I think it’s up to each lender to evaluate them individually, based on both their originating strategy and their servicing strategy. The coverage gaps are very wide—what a lender’s policy will cover versus what an attorney title opinion letter will cover. There are also many, many differences in how the coverage works.
On the servicing side, and particularly on the investing side, Fannie and Freddie have come out and said, “We’ll accept attorney title opinions in certain circumstances.” They haven’t been very specific about what those circumstances are. So, you’re not guaranteed. There’s always buyback risk from them.
Bankers are also concerned about the secondary market implications. They worry that, “Even if I accept attorney title opinions and I leave related assets on my balance sheet today, three, five, eight years from now, what if I want to sell those loans and the investors I want to sell to don’t want them?”
The lender’s and owner’s policies are typically paid for by the consumer at the time of the closing. If consumers opt for an attorney opinion letter, they don’t have to purchase an accompanying lender’s policy. And so, if banks want to sell one of those loans immediately and want to protect it with a lender’s policy, they have to buy the policy out of pocket. It’s a risk that they have to evaluate. Then there’s the risk of, “I can’t get claims paid, I don’t have the defense that I get from a lender’s policy from the title underwriter.”
And I think one of the biggest things that you have to focus on as a lender is the lack of closing protection. The title opinion is only about the title side of the business. The closing is where the most risk is. That’s where the money transfers hands.
Underwriters have issued closing protection for lenders in conjunction with their title policies, which protects against fraud regarding the signatures on the documents and the handling of funds, which has nothing to do with title. It has everything to do with the closing piece of it. Lenders can’t just look at the policy itself as a difference, they’ve got to evaluate that part of it too.
What are the risks I am inheriting on the settlement side of the house?
Bossers: The other piece of it is the cost. There’s been this misnomer put out there that the title insurance on a lender’s policy is extremely expensive. It’s not expensive at all, actually, especially on a refinance. If you have the right providers, they have access to bundled rates for centralized lenders who can distribute volume nationally.
Total fees, including owner’s and lender’s policies, plus closing are typically about $800 on a $250,000 loan, or less. Go to an attorney, try to get them to settle, and to provide the right title opinion for less than $800. I challenge you to do that.
The federal government is putting a ton of pressure on the business, the industry, the GSEs, and the mortgage lenders, in general, to improve a low-income consumer’s ability to get into a home. But the attorney title opinion doesn’t do that at all. It makes no impact. And if anything, it creates additional risk for the consumer, because the consumer would be losing their right to defense and reimbursement in most claims cases.
What are the primary headwinds you’re facing as we approach 2023, and how are you working to surmount them
Bossers: The headwinds are the headwinds of the interest rate environment. When you see MBA come out and say the forecast is $2 trillion or less next year, coming from a market that was $4.4 trillion in 2021, that is an enormous headwind. But I think it’s also an opportunity, right? Because right now is the time, we believe, [to focus on efficiencies].
Over the last couple of years, everyone was too busy to get anything done from a productivity and efficiency standpoint.
Efficiency-wise, lenders were just drinking from the fire hose, taking it in and trying to get everything out that they could. Now is the opportunity to use different products and different processes, and implement what we’re calling the “base hits,” the small wins that can make you more efficient.
What are some examples of what you’re focusing on during this time of “base hits?”
Bossers: In 2020, we implemented our national instant title engine, and that’s focused on refi. So. we’re actually in beta right now to move that into the purchase environment as well. With purchase for title, you have to search back longer in the history. You have to go back a couple more owners, and so data access becomes an issue. But as data becomes more and more digital, these engines are usable for purchase as well.
Another example is the use of digital closings. We are helping several lenders and servicers embrace a true full digital closing experience. And on the appraisal side, the implementation of our proprietary RemoteVal technology from our sister company INCENTER Appraisal Management [4] is completely changing the process and timeframes for how the lending world gets their property valuations.
What are the big wins you’re most proud of accomplishing in 2022?
Bossers: I think everyone understands that origination costs in our marketplace are too high and they’re all looking at creative ways to address that. This industry, historically, has been afraid to implement broad changes to the way we do things. Because origination costs have skyrocketed, the federal government, the GSEs, and lenders are looking for better things and are more willing to implement changes that they wouldn’t implement in the past.
With the use of technologies and processes that we are bringing to the table, and with the brain trust of our leadership team at INCENTER, we can definitively say we are helping the lending industry to streamline operations and evolve.
We’re going back and looking at this wave of business that everyone had to ingest in 2021. What did we do wrong and how do we do it better the next time?
And I think that’s what I’m excited about. The conversations that we’re having with the community at large, the industry at large, are different than in the past. There are a lot of folks now who are coming in with that attitude of, “Let’s make this right the next time.”
Katie Brewer, COO, Selene Finance
What are the primary headwinds you’re facing as we approach 2023, and how are you working to surmount them?
Brewer: The rising interest rates are impacting all lines of business, and everyone within the mortgage and real estate space is in a similar situation. So we’re asking ourselves, how do we differentiate? How do we adjust our strategy, pivot, and ensure that we’re focusing on the right scopes and the right products?
From a servicing perspective, we specialize in more high-touch servicing, special servicing, and loss mitigation. We also service a sizable population of business-purpose loans. This year, we built out our capabilities and further refined our servicing model for business-purpose loans as we’re dealing with a different type of customer. We nearly quadrupled that portfolio.
We’re looking at how we continue expanding our product sets. How do we get ready for what’s next, instead of continuing down the path where we were previously headed. From a title perspective, we’ve really expanded our footprint, and while we have been licensed in all states, we’ve now taken on more of that directly, as opposed to using workshare partners. We are heavily involved in the individual transaction market with our partners, as well as the securitization space, and we’ve supported a significant number of SFR securitizations. It’s a smaller market when you look at it; more of a commercial-type transaction. We’re focused on continuing to expand our capabilities and improving the process and experience as we go.
From a due diligence standpoint, we’ve focused primarily on the non-QM space and less in the conventional space, so now we’re actively increasing our product suite.
We’re currently building potential for non-performing loans and reperforming loans. We have quite a few other different scopes that are in line from a new product perspective as well. We want to grow ourselves as a more full-service diligence firm and we see significant opportunity in the space, including consolidation in the market.
How do you navigate shifts in the market from a staffing perspective?
Brewer: Automation and cross-training. Automation adds efficiency, accuracy, and cost reduction. We partner closely with our technology partners to identify opportunities for automation so we can focus our human capital efforts on where we need them most.
From a diligence perspective, our teams are organized by product type. If client volume is low, we want to be able to shift resources and get the most efficiency out of being able to shift and focus on another product or client.
When facing a possible recession, are you more focused on innovating, bunkering down to improve efficiencies, or both
Brewer: We’re focusing on both. Of course, we all wish volumes were back where they were earlier this year, but we see this as an opportunity for growth. With our strong financial backing, we are in it for the long haul, and that’s across all of our businesses. The more that we can innovate, make things more efficient, and automate, the better we’re going to be from a long-term perspective. We’re really choosing to invest in ourselves and grow so that when volumes do come back, we’re ready and all we need to do is scale and go.
What are the big wins you’re most proud of accomplishing in 2022?
Brewer: If we look at the end of 2021 to now, we’ve grown our servicing portfolio by about 60%. I mentioned the BPL growth that we’ve seen; we quadrupled that portfolio, and we focused on the borrowers’ channels of choice, how they prefer to be contacted. We focused on opening other methods of being able to interact with us and modernizing communication.
Better chat, enhanced email functionality, and overall looking at how we can better serve the borrowers. We’ve made a lot of strides in building that out and have tried to focus on how we can remove friction and make it an overall better experience.
We are also in the final stages of redesigning our customer website. We’re investing in providing our borrowers resources to help navigate market conditions.
From a title perspective, we’ve expanded our markets and are continuing to internalize as much production as we can. We made substantial progress this year and have additional planned expansion.
From a diligence perspective, this year alone, we’ve participated in over 40 securitizations. We’re an approved rating agency TPR firm with proven experience and a broad client base. We’ve continued to grow year-over-year and demonstrate our experience and footprint in the market. With current market conditions, it’s a bit of a pause in the significant growth we’ve seen in recent years.
But again, as we pivot and look at what else we can build, automate, and improve, it’s positioning us for a very successful future.
Tom Clerici, CTO, Freedom Mortgage
What are the primary headwinds you’re facing as we approach 2023, and how are you working to surmount them?
Clerici: A lot is going on, particularly in the technology space. From Freedom Mortgage’s perspective, it’s all about engagement with our customers. We’re in a digital age. We want to make sure that everybody can work with us via the mechanism that they feel best, whether that’s on their computer, on their mobile device, or on their phone, whatever it is. A large portion of what we’re working on is around what we can do for our customers and consumers in general. How do we improve engagement with our customers and consumers in need of a home loan? How do we make it easier for them to work with us? How can we best help them in fostering homeownership? And how can we bring the tech tools to bear, so that the process is beneficial and seamless as it can be?
The cyber challenge is always there, so we’re always doing what we can to harden our systems and defend and defeat whatever the latest and greatest threats are.
There are new ones every day, and there’s a lot at stake. We put a lot of time and energy into protecting our data and our customers’ information, and I think 2023 will see more of that.
We’re seeing more customers want to engage on a mobile device. They want it to be immediate. They don’t want to talk to a human. They want to do as much as they can directly with the systems. We have been working to meet our customers where they’re at, and we’re proud the Freedom Mortgage app has received positive ratings. Some borrowers, they’re a little more traditional about the way that they want to originate loans or how they want to deal with their servicers.
At Freedom Mortgage, we have to offer a variety of ways for anyone to contact us. We make it especially easy for our customers to get in touch with us via phone, online, or the mobile app.
Has COVID-19 changed how Freedom Mortgage operates and serves its customers?
Clerici: When it comes to home loans, most of our business is not face-to-face but done over the phone. From a borrower perspective, COVID-19 didn’t change much as far as how our customers wanted to engage with us. We were still providing support over the phone prior to COVID-19, during, and even now. We continue to offer our customers a number of options to get in touch with us.
With our employees, there was a big change because, prior to COVID-19, they were in the office five days a week, and since the pandemic they’ve been home and many continue to work remote.
COVID-19 forced our user community and employees to adapt to using technology if they were reluctant to do so beforehand. And our cybersecurity posture was such that we were always ready to go home at a moment’s notice.
What are the big wins you’re most proud of accomplishing in 2022?
Clerici: Number one, we released our mobile app this year. We’re finding that a lot of our customers want to go there to make their payments or view their statements. Just given the amount of activity that we’ve seen on the mobile app, that’s a big win. In addition, we did a lot of work within our point of sales system to make the process more efficient for our loan advisors and centralized the platform that they were using.
The change also improved the customer experience because the loan advisor can quickly access information without having to sift through multiple systems.
We also closed out what most companies call cloud migration. We’ve shifted a lot of our stuff from traditional, on-premises technologies to the cloud, which has enabled us to support what is needed, so we can scale both up and down. Our business is interest-rate sensitive, and so the consumption that’s needed when the interest rates are dropping is vastly different than the consumption that’s needed when the interest rates are rising.
Through that cloud migration path that we went through, we can now scale our systems on the fly, in line with what the demand is. This has been beneficial to us from a cost savings perspective.
We’re not limited to having to buy a whole bunch of hardware needed to scale up every time demand increases. We can support our customers and get them what they need to ultimately foster homeownership.
When facing a possible recession, are you more focused on innovating, bunkering down to improve efficiencies, or both
Clerici: At Freedom Mortgage, we can walk and chew gum at the same time. There are things we have to do in a rising interest rate market in terms of cost-cutting.
We do those things where we have to, and then we allocate what we can to the innovation piece where it’s available to us. We don’t stop innovating based on the market conditions.
With mortgage tech, the more we can do, the more self-service we are able to offer to our customers, and that’s what they want to see. Our ability to meet that need digitally is exciting to me. It is a challenge because we have such a wide range of customers, some that are very, very adaptive to the new and emerging technologies. Others are more reluctant. It’s important to us to support every customer, as well as maybe try to convince some of those people who are unwilling to adopt the newer technologies that this is a good thing for them.
It’s not necessarily just about us, it’s about making their experience better and enabling them to do things as opposed to having to get on the phone. It’s going to be exciting to see what more we can offer our customers and how we can make that digital experience a lot better for them.
Brian Gould, COO, Enact
What are the primary headwinds you’re facing as we approach 2023, and how are you working to surmount them?
Gould: It’s a good question. I would say “uncertainty” is the theme. Will there be a recession? Will it be shallow or will it be deep? Planning for uncertainty is the number-one focus. Not knowing where mortgage volume and interest rates are going to be, we do offer contract underwriting services so we can be a variable-cost option for our customers who are unsure of how to staff for the uncertainty.
The foreclosure moratoriums expired at the end of 2021. It typically takes 12 to 18 months before you’re getting through the foreclosure process, so we expect to see more claims next year as we return to pre-COVID-19 claims levels. As an insurance company, one of our core commitments to our customers is to pay claims timely and accurately. There is a potential for higher delinquencies going forward. So, we have a homeowner’s assistance team that partners with servicers to assist them if they have questions about home retention programs, or to remind them that they have delegation agreements with us to do modifications on loans to help families stay in their homes.
Most recently, we are partnering with a firm called NextJob, a company that assists borrowers to get back to secure a job who’ve been unemployed or underemployed. They work with them, from resume to interviewing, getting prepared. It’s a no-cost option that we’re offering servicers that work with us. We’re willing to pay for that service to assist people. Lastly, we do offer white-glove service where we do letter and phone campaigns to delinquent borrowers—not to collect the debt, just to put them in touch and handoff to the servicer so that we’re making sure all options are exhausted for people or families who want to keep their home and have the financial ability.
Again, to be very clear, we’re not collecting the debt. Our goal is to get Mr. and Mrs. Borrower in touch with their servicer. And the servicers have done a better job since the global financial crisis. I give a lot of credit to the government for the forbearance programs; they were very simple.
People could implement those very quickly. If you go back to the financial crisis, some of the modifications that required a net-present-value model, it was very complicated. You had to review someone’s financials. If they were stale, you had to ask for more documents.
How do your current preparations for ongoing higher rates or a recession compare to how you had to adapt to COVID-19?
Gould: One of the things we do in the operations team is cross-train people for other jobs. So, if the delinquencies increase, we can shift employees to help in that area. And we’ve gotten a lot of positive employee feedback that, “You hired me as a claims person, but now I understand underwriting, I understand home retention,” and vice versa. If underwriting demand increases, we can shift people that way. We spend a lot of time preparing and testing these capabilities.
How have your priorities and focuses changed as we’ve continued to emerge from COVID-19?
Gould: We decided to challenge ourselves and do an IPO in September of 2021, so this is our first full year as a public company. We’ve been building capabilities that we didn’t necessarily have inhouse at Enact. Also, we deployed some more data-driven technology in our underwriting capabilities. We were able to implement data-driven models and technologies to further segment loans as far as how you underwrite the risk of the loans and use that technology to automate some of the low-value, no-value-added kind of steps.
That enhanced our turn times, which is better for customers. We want to solve for the minority homeownership gap, to the best of our control, which is mortgage insurance. So, looking at how we underwrite the credit of a loan, what we notice is that minorities are more adversely impacted by not having credit scores. We want to help families and borrowers who are creditworthy but not yet homeowners, who don’t have a credit score.
How do we do that? We made our pricing more competitive for borrowers that don’t have a credit score. We also expanded the underwriting guidelines. We aligned with the agencies, Fannie Mae and Freddie Mac, but we also expanded. We will go up to a 97% loan-to-value ratio and 45% debt-to-income ratio. There is a lot of momentum around how to help solve the homeowner’s gap, and this was one thing we wanted to put our capital and our expertise behind to help our mortgage lending partners.