Rida Sharaf: Ready…Set… Go! The Mortgage Industry’s Upcoming Obstacle Course

Rida Sharaf is Chief Strategy Officer with U.S. Real Estate Services (USRES), Laguna Nigel, Calif. He is an experienced senior executive, consultant and active thought-leader specializing in multiple facets of the real estate and specialized loan servicing industry. Skilled in default asset management and servicing, collateral risk assessment, liquidation solutions and overall business operations and strategy. Primary focus and interest on service/product efficiency, ROI maximization, joint venture opportunities and M&A activities.

As yet another extension of the nationwide pandemic eviction and foreclosure restrictions is put in place (at least for federally back mortgages), the mortgage industry is bracing for formidable challenges on a number of fronts.

Back in March 2020, about two weeks into the pandemic, few people without government security clearance or quick-communicating confidants in the Wuhan region of China could have imagined a lockdown that is approaching 450 days. Some parts of the country had more restrictions than others; California being the leader in peppering a litany of restrictions, ranging from potentially prudent to nonsensical. However, the vast majority of financial institutions in any location continued to act upon national guidelines and carefully design strategies with regard to loss mitigation procedure or better put, almost complete restriction-of-action.

While the country tries to move past the economic damage caused by the aforementioned restrictions, the proverbial “pause” button has been engaged on mortgage industry participants specifically related to mortgage loan loss mitigation (with the exception of forbearance plans, of course) activity. The impending moratorium-lifting, the forbearance plan expirations and the un-pausing of loss mitigation activity will create new challenges for our industry.

First, let’s examine the loss mitigation back-log. As many in the industry are aware default, foreclosure and collateral re-marketing has always been and will continue to be part-and-parcel to mortgage loans and the servicing process. This can be a very small percentage of a performing portfolio or a large part of a non-performing portfolio. However, it is always present and to that end, the role of specialty-servicers largely revolves around these risk and loss mitigation activities. The pandemic restrictions included blanket foreclosure and eviction moratoriums in an effort to prevent individuals and family’s loss of primary residence from becoming collateral damage caused by the nationwide lockdown.

At the point when the pandemic became a terrifying reality, there were an estimated 200,000 loans already in a foreclosure or post-foreclosure status. Side note, at the end of 2020, estimates show Fannie Mae and Freddie Mac holding a combined $1.2 billion REO property inventory.  The majority of these loans have a “no possibility of disposition” label attached caused by the aforementioned moratoriums. While there may be some exceptions, it is safe to assume the majority of these loans will be back in foreclosure/REO status as the national moratoriums are lifted, whenever that may be. While a portion of this volume was present at the being of the pandemic, the process of picking-up-where-we-left-off is going to be challenging. Simple changes in borrower circumstances will prompt recollection of documentation, which in effect, begins the process all over. Unfortunately, these loans will not be the only volume we will see in these predicaments in the coming year.   

According to recent reports, an estimated 1.2 million loans (FHA, VA, & PLS portfolios) in forbearance that are due to expire from now until the end of 2021. Based on recent forbearance exit data, a little more than 80% of borrowers established a repayment plan upon exiting the program. This leaves about 20% or potentially around 240,000 loans that statistically may exit their forbearance plan with no repayment agreement or plan. While we all try to be optimistic, given the information above, it’s becoming clear that an influx of volume is due. Do we (mortgage industry) have the resources? Are we ready and available to address this considerable volume? The answer may prove to be more complicated than we would like.

Operational Personnel/Subject-Matter Experts

Adding to the constriction, as unemployment benefit applications slowly descend, the nation is experiencing a relatively new and scary phenomenon, businesses can’t find employees, let alone employees’ who are qualified AND willing to work. Many point to the enhanced and extended unemployment benefits offered by the federal government as the culprit for this unwanted and certainly counterproductive labor trend. On its face, this seems like a sound correlation to make, and it may very well be true, but that’s another story altogether. Still, the fact remains that there is a shortage of labor and almost all industries are susceptible. The financial industry does have some advantages in this area. Internal resource reallocation could be used to fill-in where needed. For example, as origination channel volumes slow, those resources could be shifted to other areas requiring attention, specifically, loss mitigation departments. This is obviously not a perfect solution because of training, attrition and a myriad of other complexities.

Real Estate Broker/Agents

Interestingly, current low interest-rates and limited inventory is combining to create soaring property valuations and an ultra-competitive seller’s market. Online marketing-experts and old guard brokers with their robust networks and connections are winning the battle for new listings, which are in short (but increasing) supply. This leaves the remaining 80% of brokers who were already doing only 20% of the available business with even less to fight over. This is a recipe ripe for career changes, and it has been shown with a marked decrease in brokers entering the real estate business and an increasing number exiting. It’s important to note separately that the real estate broker industry itself is in the throes of a foundation shift. A recent study found that 99% of millenniums (the largest first-time homebuyer population) use online searches to find and learn about properties they are interested in purchasing. Brokers’ exclusive access to MLS databases has been effectively marginalized and is currently the topic of highly watched legal battle waged by Real Estate Exchange Inc. (REX). Realtors who have not adapted to this new reality will be quickly moved out of the profession. To that end, services that are typically completed by brokers for financial institutions are numerous. The movement away from the use of brokers for field services had already begun; however, technology and the pandemic may have accelerated the acceptance of this notion.

Ancillary Financial Services (attorney services, field services, collateral re-marketing, etc.)

At the same time, companies around the nation have completed restructuring efforts, which included dramatic downsizing. Some industries thrived, while a great number of others withered away, often being gobbled up by opportunistic buyers or simply just went out of business. It would be fair to say, the landscape looks vastly different than before. Ancillary financial services companies related to default and loss mitigation experienced this in droves. Consolidations and “terms not made available” acquisitions are happening almost daily. The trusted vendors of yesteryear may only be a shell of their former selves, if they exist at all. New relationships with new vendors will need to be established and quickly integrated into the existing process.

The combination of the pre-pandemic foreclosure volume and potential forbearance fall-out, along with professional service provider shortages are the things that keep most managers up at night. That being said, inquiry requests and initial meeting activities with financial services specializing in default and loss mitigation are increasing, which means people are thinking (and worrying) about what is coming on the horizon. This is a good sign that some organizations have mobilized plans to shore-up their loss mitigation volume scalability strategies. The fruits of these early actions will be reaped only by those proactive and forward thinking enough to develop thorough models and dynamic forecasting.  

The Covid-19 pandemic and the corresponding lockdowns have touched nearly every individual in one way or another. In addition to changing so much about our daily lives, the pandemic has also brought a magnifying glass to the mortgage industry. Regulatory oversight has increased dramatically. Business missteps and/or clerical errors are coming with increasingly more severe repercussions, which include highly damaging reputational risk and degradation. As we all get our bearings in this new world, we will need to remain open to new ideas and new ways to meet these challenges and continue to serve our clients, consumers and communities. 

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)