A Decade after Financial Crisis, a ‘New Normal’ For Residential Mortgage Servicing?
Ten years after the financial crisis, residential mortgage servicing is finally settling into a “new sense of normal,” said S&P Global, Dallas.
“Today, residential mortgage servicing involves complex regulation, increased mandatory workout options, and multiple layers of internal control functions,” S&P said. “Over the past 10 years servicers have had to not only modify their processes, but also hire more employees and enhance their technology infrastructure and internal controls to support those new processes. As a result, servicing mortgage loans has become less profitable, which has caused loan servicers to consolidate and has created a barrier to entry for new servicers.”
This complexity has contributed to higher costs, S&P noted. Since 2007, the average cost to service a loan per employee has risen 94 percent, peaking at $475 in 2012 and steadily declined to almost $300 as of the end of 2016–still higher than pre-crisis levels.
“However, servicers have begun utilizing enhanced technology to create efficiencies and automate many of the required controls,” S&P said. “With automation, servicers can increase the number of loans serviced per employee, which can help reduce their total servicing costs. This should lead to smaller increases in total costs even if delinquency rates rise.”
New regulatory requirements have also extended workout timelines for delinquent accounts, and modifications now make up about half of loan workout strategies, S&P noted. “The time it takes to complete the foreclosure process has increased as well, even though the percentage of loans in foreclosure has decreased in recent years. We do not anticipate a return to the timelines experienced before the financial crisis because the foreclosure process now involves more mandatory regulatory requirements.”
Total delinquency rates have only just begun returning to around pre-crisis levels as the economy–and borrowers’ abilities to make their mortgage payments–has improved,” S&P said. “Lower delinquency rates can also be attributed to delinquent accounts moving through the default management process, either becoming re-performing loans after modifications or through liquidation.”
The report said higher home prices have helped counteract loss severities despite longer foreclosure timelines and greater costs. It said between 2007 and 2011, loss severity rates nearly doubled–increasing to nearly 50 percent in 2011 from 25 percent in 2007 for prime loans and to nearly 75 percent from just below 40 percent for subprime loans. After spiking in 2011, loss severity rates have almost returned to 2007 levels for both prime and subprime loans.
“As mortgage delinquencies continue to improve and return to pre-crisis levels, we expect performance and portfolio metrics to stabilize,” S&P said. “This does not mean, however, that those metrics will return to pre-crisis levels. Most mortgage loan servicers have already invested in new processes and technology and despite the cost to support these and adapt to any additional requirements, we do not expect them to strip back the controls that have become their new normal.”
