The US mortgage industry is experiencing a dynamic situation at the moment. In the backdrop of fears of an impending recession, mortgage servicers are getting ready to take robust measures to mitigate risks in default servicing.
While on the one hand first-time mortgage default rates are declining, payments delayed for less than 90 days are also slowly going up. Numbers point out that the default rate across leveraged loan types has been rising, almost tripling in 2022.
Nature of Risks in Default Mortgage Servicing Today
To better understand the measures taken by servicers to mitigate risks, let’s look at the reasons why default risks can rise.
One of the most common reasons is borrower capacity. Owing to poor financial conditions, debtors are unable to make payments on time. Regulations and political aspects are other common causes that give rise to mortgage default servicing. For instance, when a forbearance law that has come up due to political reasons lapses, it can increase the risk of borrower defaults.
There have been high defaults rates in 2009, and then again in 2020 when the pandemic struck. In today’s situation, inflation is another reason for mortgage default servicing, as rising prices have reduced borrowers’ capacity to spend. However, this is not a predominant trend, since the housing market is still healthy in some segments and regions.
A general rule for servicers for loss mitigation in mortgage, therefore, is to be careful and vigilant while communicating with empathy. This can help mitigate risks in a volatile market. Servicers also need to be prepared to deal with foreclosure/bankruptcy cases without pulling back on business growth.
Ways to Mitigate Risks in Mortgage Default Servicing
1. Pre-emptively increase interest rates
One way to mitigate risks is by filtering out borrowers by spiking interest rates. High-interest rates help sift out borrowers and choose only those who would be able to honour payments in the long term. Some servicers offer adjustable rate mortgages that modify interest rates at pre-determined intervals. This way of mortgage default servicing is based on financial health and other economic factors.
2. Streamline & automate borrower servicing communication
Proper streamlined communication channels can go a long way in managing loss mitigation in mortgage. It’s a way of ensuring that borrowers are always aware of the time when a payment is due and can be prepared. Servicers can also anticipate forbearance conditions and provide timely relief to reduce foreclosure/bankruptcy.
Find out how PrivoCorp can help in improving borrower experience and retaining them
3. Stay on top of regulatory and compliance needs
It is imperative for servicers to incorporate the latest regulations in an agile manner to mitigate risk and handle mortgage default servicing better. Businesses can invest in a risk management platform that offers comprehensive compliance services along with other necessary features like workflow automation, data intelligence and so on.
4. Rigorously assess financial health
One of the best ways to mitigate risks is to undertake a thorough assessment right at the loan underwriting stage. Thanks to advanced cloud-based technologies available to automate the origination process, there is data to point to warning signs that may be overlooked by a human executive. Furthermore, appropriate Verbal Verification of Employment (VVOE) averts unforeseen changes in borrower financial health from impacting the loan.
5. Strengthen data infrastructure
With the help of data, mortgage default servicing companies can choose proactive risk monitoring instead of a reactive one. An integrated data canvas offers a range of risk information, including change in employment, above or below-average spending, new loans, changes in the household income and so on. This will determine the exact source of risk and streamline mortgage default servicing.
How PrivoCorp can help mitigate risks and improve margins
With its industry-leading servicing profile, PrivoCorp is uniquely positioned to help servicers transform their mortgage default servicing. We are equipped with a comprehensive platform to help servicers manage forbearance and other default-related requests with a high level of quality and consistency.
Our solution rides on robust technology and a unique ticketing system that tracks every request through to its logical closure while tracking SLAs & timelines. It also offers dynamic compliance services that immediately flag compliance issues.
Our loss mitigation in mortgage solutions combined with technology-based tools, six-sigma, and ISO-driven processes are designed to mitigate risks and deliver higher margins. The expert teams ensure rigorous quality and governance through a milestone-based examination of mortgage loan servicing activities. Our hybrid delivery model ensures round the clock support to reduce cycle time and improve customer satisfaction.