Sponsored Content from SWBC: Mortgage Market Outlook and Risk Management Strategies for Lenders
Blake Hastings joined SWBC as SVP of Corporate Strategy and Chief Economist in July 2021. In this role, he provides leadership in the areas of corporate development and long-term growth strategies. He also supports our business development goals and activities by leveraging external relationships in both the public and private sectors. Prior to joining SWBC, he worked for the Federal Reserve Bank of Dallas for over 14 years. He served as a Senior Vice President overseeing the San Antonio and El Paso branch offices.
As the mortgage market continues to evolve, mortgage servicers face new challenges and opportunities. A solid understanding of the latest industry trends, economic outlook, and regulatory requirements is essential for success in this competitive landscape.
Over 14 years working in senior leadership at Federal Reserve Bank of Dallas, I have witnessed firsthand the importance of adopting proactive risk management strategies to navigate the ever-changing mortgage industry. One such strategy that has proven invaluable for many financial institutions is the adoption of lender-placed insurance (LPI).
In this article, I’ll provide a brief overview of the current mortgage market and U.S. economic outlook from my latest Research Brief with Ed Delgado, Managing Director of Mortgage Policy Advisors. I’ll also discuss the critical role of LPI in managing risk and ensuring compliance, and share insights on how mortgage servicers can leverage LPI to protect their investments and better serve their borrowers.
2023 U.S. Economic Outlook: Recession Ahead
Continued inflationary pressures (especially from housing and wages) are resulting in tightening monetary policy and more restrictive credit conditions across all forms of lending.
Coupled with negative real wage growth, decreased savings, and a worsening outlook for consumer spending, expect to see a recession beginning Q3 of this year.
The one positive indicator continues to be job growth, which came in above 470,000 in January, 320,000 in February, and 230,000 in March. There are signs the labor market may be softening with a number of layoff announcements and temporary hiring slowdowns.
The strong labor market is a primary reason for forecasting that the impending recession will likely be short in duration and shallow in terms of economic activity and jobs.
Additionally, the financial sector has much stronger balance sheets that should limit any negative feedback loops that can occur with defaults and charge-offs.
The base case is still for the recession to last two-three quarters and for unemployment to peak around 5.5%. Long-term secular demographic challenges will result in a return to full employment within two-three quarters after the recession ends.
Mortgage Market Outlook for Lenders
The mortgage market has experienced significant changes in recent years, driven by factors such as rising interest rates, tightening lending standards, and shifting demographics.
The housing market can be considered the economic sector most susceptible to fluctuations in interest rates. As mortgage rates experience ups and downs, anticipate a reverse relationship with demand.
- Market rates may start to drift downward toward the middle/end of 2023 in anticipation of the Fed lowering rates in 2024. (Due to both spread normalizing and treasury rates coming down).
- It may take years (if ever) for some market rates to return to pre-pandemic levels.
- Pandemic levels were anomalous and not likely to occur again unless significant economic stress occurs.
The rising interest rates environment has led to a slowdown in refinancing activity, prompting many institutions to focus on purchase mortgages and expand their product offerings to meet the diverse needs of homebuyers. At the same time, the tightening lending standards and increasing regulatory scrutiny have underscored the importance of robust risk management practices and compliance with applicable laws and regulations.
The Value of Lender-Placed Insurance in Today’s Mortgage Market
In this context, lender-placed insurance (LPI) has emerged as a critical tool for mortgage servicers to protect their investments and ensure compliance with regulatory requirements. LPI is a type of insurance policy purchased by a lender on behalf of a borrower when the borrower’s own insurance coverage lapses or is deemed inadequate. By providing a safety net against potential losses, LPI helps lenders mitigate the risks associated with default, foreclosure, and other adverse events.
Additionally, LPI can help lenders ensure compliance with federal and state regulations, as well as investor guidelines. Regulators and investors often require that properties securing mortgage loans be adequately insured against potential hazards. By having an LPI policy in place, lenders can demonstrate their commitment to protecting their investments and meeting their regulatory obligations.
Finally, LPI can serve as a valuable customer service tool. By proactively monitoring insurance coverage and stepping in when a borrower’s policy lapses or is deemed insufficient, mortgage servicers can help their borrowers avoid costly penalties and potential legal issues. This not only protects the lender’s interests but also helps maintain the borrower’s financial well-being.
To gain more valuable insights on navigating 2023 mortgage industry challenges, download our free Research Brief: Mastering the Mortgage Maze in 2023: Market Outlook and Risk Management Strategies for Lenders.
(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at email@example.com or 203/834-8832.)