Brett Benson from Rocktop Technologies–Maximizing Investor Yields During Rising Mortgage Delinquencies
Brett Benson is Co-President and Chief Investment Officer, Rocktop Technologies, a Solutions-as-a-Service company empowering institutional investors, asset managers and other holders of risk in the fixed-income and mortgage markets to improve yields.
MBA NewsLink: What struck you about MBA’s findings of a recent year-over-year increase in residential mortgage delinquencies?
Brett Benson: Although it was a small uptick, it may be a harbinger of a longer-term trend. From an economic standpoint, a combination of inflationary pressures and expected higher rates for longer, reduced savings, and fewer refinancing alternatives have created these delinquencies. Distress from natural disasters and continued supply chain issues similarly create upward pressure on housing prices making affordability options even more limited.
MBA NewsLink: What implications do the delinquency numbers have for investors?
Brett Benson: In any market, mortgage investors need the flexibility to continually shift their liquidity and hedging strategies in response to new opportunities. If delinquencies increase, the same flexibility imperative will apply but with potentially higher risks.
To maximize yields, investors must place an even greater premium on identifying and addressing risks, as these risks are amplified during default cycles. For investors, it’s all about the timelines, cash-flow, and the cost of carry.
Ensuring that core milestones have been met on a timely basis is key for getting nonperforming loans reperforming or liquidated as quickly as possible. Just as important are containing controllable costs and the recoverability of these expenses.
MBA NewsLink: What kinds of risks must servicers address in order to help investors?
Brett Benson: It begins with servicing process risks, which by their very nature, can generate inadvertent errors, omissions, inefficiencies and unnecessary disputes that increase investors’ costs, and drive down their yields. In a delinquency or default cycle, everything from title reviews to the recording of borrowers’ payment plans can contribute here. Transparency and responsiveness to these risks are what help differentiate in this highly regulated environment.
For example, if a bankruptcy is involved, necessary processes like creating and validating Form 410A—which includes capturing data from various payment history ledgers, processing pre-petition transactions, and much more—can create operational inefficiencies and risks due to the manual nature of the process. Any occasion that requires data or document handoffs, conversion of manual data or call center records to digital formats or searching for a key piece of data from variously formatted documents, can create risks that are permanently baked in until careful diligence surfaces and the servicer addresses them.
MBA NewsLink: In the past couple of years, the pace of mortgage delinquencies has been relatively slow. Have servicers been trying to remediate the issues you mentioned during this “down time”?
Brett Benson: Yes, some have but others have kept to the status quo. The general industry slowdown has affected their priorities. They are doing everything possible to reduce their costs and streamline operations. Some of their diligence and legal partners are in a similar situation.
Right now, rising delinquency activity may not feel like an immediate issue, but if it persists, servicers will be forced to scale quickly without being overwhelmed. This is the best time for them to evolve their processing operations at the strategic and tactical levels—looking at where loans can be derisked, and how to better manage their portfolios.
Those who step up will ultimately help investors by reducing the costs of keeping nonperforming loans on their books and shortening those all-important timelines to reperformance.
MBA NewsLink: What preparatory steps are servicers taking now?
Brett Benson: They’re looking more carefully at their operations to see what they can either outsource or automate, especially if bringing in more FTEs is off the table.
Automation solutions that apply AI, large language models (LLMs), data science, and machine learning are empowering them to improve their own efficiency, and make risks more transparent, so that investors, in turn, can be more agile. Their diligence and legal partners are using these technologies, as well, in processes like servicing comment review, invoice reconciliation, claims processing, and others specific to default process automation—like bankruptcy and the 410A processes previously mentioned. Although humans must remain involved at some level, technology is truly changing the game.
(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)
