It has been more than 12 years since the financial crisis began in America, a turbulent era few will ever forget. A tsunami of mortgage defaults, foreclosures and household bankruptcies flooded the U.S. banking system, magnified by a bursting housing bubble. Strategic defaults by underwater homeowners further fueled the crisis. According to Black Knight, more than seven million housing foreclosures occurred in the years following the deepest economic downturn since the Great Depression. The speed and severity of the crisis left many mortgage servicers without the people, processes and technology in place to handle the unprecedented default and foreclosure volume.
The aftermath of the crisis resulted in new legislation and oversight agencies such as the Dodd Frank Act, the Financial Stability Oversight Council (FSOC), the Consumer Financial Protection Bureau (CFPB) and others to help safeguard against another financial crisis. This legislation increased the operational and compliance costs for financial institutions and resulted in a significant rise in the cost of servicing mortgage loans.
The Next Crisis on the Horizon
The financial crisis that came to a head in 2008 is slowly fading into history, but, as an industry, we would be well served to prepare for the next potential downturn. The past has proven that the mortgage industry’s market and credit risks are cyclical. Every day servicers must manage liquidity, credit, operations and compliance, all the while keeping an eye on trends in the industry and the economy as a whole.
Consumer confidence and low interest rates can result in consumers and corporations taking on a high amount of debt and the risk that comes with it. Significant shifts in market conditions or interest rates can have a positive or negative impact on the potential for a downturn…and the speed at which it could occur. The U.S. is also in the midst of an election cycle that will undoubtedly have an impact on market conditions depending on the policy decisions of the elected officials.
Many analysts were already predicting that the U.S. is due for another recession. In the August 2019 Economic Policy Survey conducted by the National Association of Business Economics, 38% of economists said they believe the U.S. will enter its next recession in 2020 and 34% predicted it will occur in 2021. Domestic and global vulnerabilities remain ever-present and could trigger the next crisis for the U.S. economy and mortgage markets at any time.
While the U.S. economy has had all-time low unemployment rates, solid GDP growth, and other indicators of robust economic activity, there are many global factors that can also affect the U.S. economy and mortgage industry, such as natural disasters, military conflicts, and international trade policies. The Coronavirus has already sent global markets spiraling due to the potential financial impact of a world-wide pandemic.
Preparing for the next mortgage default cycle is best done in a healthy economy when volumes are low – before an event triggers a downturn. Given the events of recent weeks, mortgage servicers would do well to move sooner rather than later.
Managing Increased Regulatory Demands
There are many lessons learned from the 2007-2010 financial crisis that can help servicers get ahead of the next default cycle. The financial crash had many causes, not the least of which was a large population of borrowers who had not demonstrated the ability to repay their loans. The Dodd Frank Act was designed, in part, to prevent this from happening again.
Servicers now recognize the value of being able to handle sudden sharp increases in default and foreclosure volumes in order to remain operationally and fiscally sound. However, because of the consumer protections and regulatory requirements put into place as a result of the last financial crisis, addressing delinquencies today requires additional steps, audits and outreach.
For example, the CFPB requires loss mitigation processes to help customers stay in their homes whenever possible. The regulations and oversight measures installed after the financial crisis have given consumers very specific rights regarding the loss mitigation options offered to them. These loss mitigation steps must occur before the borrower is referred to foreclosure.
Servicers must go through all the options with the borrower and document the measures taken in order to create an audit trail. This process begins by determining whether or not the borrower wants to stay in the property. While many borrowers choose to remain in their homes, some will choose not to retain ownership of their property, resulting in a short sale or a deed in lieu. When borrowers want to retain ownership of the property, the servicer must adhere to loss mitigation processes and can offer a repayment plan, a forbearance plan or a loan modification option.
After natural disasters like hurricanes, ravaging forest fires, floods and other unexpected events, lenders must also be able to quickly identify any impacted loans in the disaster area and work through loss mitigation decisioning with the affected property owners.
Another area that affects default processing is the Servicemembers Civil Relief Act (SCRA), which prohibits the sale, foreclosure or seizure of property during the period of military service or within 90 days thereafter. Servicers must make sure that if a loan is in loss mitigation or in default of any kind that they ensure military servicemembers in active duty do not suffer any losses. Having processes and supporting technology in place to identify and monitor servicemember borrowers is key to avoiding potential financial and reputational risk.
A further complication to the default process is bankruptcy claims. When a borrower can no longer afford to remain in a home, the borrower can either file for bankruptcy or go into mortgage foreclosure. When a borrower opts for bankruptcy, servicers must file with the court and manage pre-petition and post-petition dates, send notices to trustees and borrowers, manage fee notifications, etc. Managing bankruptcy claims appropriately and efficiently requires automation, especially when volumes grow during an economic downturn.
Walking through all the options with the borrower before a foreclosure – and documenting those efforts to create an audit trail for regulatory compliance – are important for loss mitigation but also add a substantial amount of work and documentation for servicers. While these steps may be manageable under “normal” default volumes, should another spike in delinquencies occur, the operational impact would multiply exponentially.
Solutions Are Available Now to Prepare for the Next Default Cycle
Black Knight’s advanced technology solutions are designed to simplify the complex process for loans that move into default, while supporting compliance requirements. The company’s industry-leading MSP® servicing system and suite of innovative default solutions, combined with comprehensive data and analytics, can help servicers mitigate losses, keep more borrowers in their homes and preserve the reputations of mortgage lenders.
MSP® Servicing System – End-to-End Support for Non-Performing Loans
Black Knight’s best-in-class mortgage servicing solution, MSP, automates all areas of loan servicing – including default functions – on a single, integrated platform. From task-based workflow and tracking technology to targeted data and default risk management, MSP is uniquely positioned to help mortgage servicers evaluate and mitigate risk, increase processing efficiencies, and address compliance with investor and regulatory requirements.
MSP also has specialized functionality for the complete range of default scenarios. For example, MSP has the ability to track and manage the loans of military service members who are protected under SCRA. During natural disasters, MSP can access FEMA data and match against MSP data to find affected borrowers and loans.
Suite of Web-Based Default Servicing Solutions
MSP seamlessly integrates with Black Knight’s suite of easy-to-use, web-based default servicing solutions. These applications deliver rules-driven automation and advanced workflow to streamline bankruptcy, foreclosure, loss mitigation claims and invoicing processes.
When loans enter into default, servicers need consistent processes to provide borrowers with timely loss mitigation assistance. Black Knight’s Loss Mitigation offers a comprehensive, end-to-end loss mitigation workflow and decisioning solution that supports industry-standard retention and liquidation workouts, and creates an audit trail to show compliance with evolving regulations. It uses validation points throughout the workflow, and through a targeted and guided questionnaire, users can quickly and easily address each validation before moving to the next step, so critical information is not overlooked. It supports federal loan workout programs with configurable investor matrices and workout waterfall hierarchy, to help servicers determine the best plan for the borrower. Subsequent decisions and activities can be tracked, time-stamped and recorded to support compliance.
Black Knight’s Bankruptcy℠ solution replaces the time-consuming, labor-intensive loan bankruptcy process with robust automation via workflow and configurable, rules-based technology. Using Bankruptcy’s integration with MSP, loan data can be retrieved to produce approved U.S. Bankruptcy Court Proof of Claim (POC) forms. Servicers can prepare, modify and approve POC forms and upload documents that need to be included. They can also print the forms directly from the application or transmit the data to an approved third party to complete the filing. Additionally, the solution can help servicers minimize errors, reduce risk, increase processing volumes and manage court notices.
Black Knight’s Foreclosure℠ solution provides a single, secure and scalable technology to support the foreclosure process. It deploys automated workflow management technology and a configurable business rules engine to facilitate foreclosure process productivity. Processes are configurable to existing business practices and will conform to investor guidelines.
Black Knight’s Claims℠ solution streamlines default-related claims processing for multiple types of claims and loss analysis functions. It includes complete, automated capabilities that create, track, submit and reconcile each claim type, before storing the claim package online with all related documentation.
Black Knight’s Invoicing℠ solution helps servicers consolidate invoice process tasks – from bill presentment and processing to post-payment activities. It saves time, eliminates errors, reduces processing expenses and prevents default-related losses by automating the billing and invoice process.
Digital Convenience for the Borrower
In addition to Black Knight’s suite of default servicing solutions, servicers can leverage the advancements in digital capabilities to give borrowers anywhere, anytime access to valuable loan, home and neighborhood information. These self-service tools provide a channel for proactive communication to preserve borrower relationships, especially during default cycles when borrowers need more information and consultation to make important financial decisions.
Servicing Digital℠ is a white-labeled mobile app and responsive web application that features interactive home, loan and neighborhood dashboards enabling borrowers to easily access important information about their home loan. Capabilities include reviewing property or loan information, evaluating payment options, making a payment or viewing payment history information. Borrowers can also determine their current home equity, look at refi options to lower monthly payments and view the time-to-payoff impact of different scenarios. By accessing the market or neighborhood overviews, borrowers can evaluate their home in comparison to neighboring houses to consider whether to list their own home.
An upcoming feature of Servicing Digital will provide a valuable tool for communicating with affected borrowers during natural disasters. Servicers will be able to use the app to check on the borrowers’ disaster-related status and work through loss mitigation scenarios to expedite decision-making and assistance.
Plan Today for What’s Coming Next
The time to prepare for the next default cycle is when volumes are manageable. Black Knight’s suite of default servicing solutions can help increase operational efficiency, reduce operating costs, address regulatory requirements and improve risk mitigation. When the next default cycle comes – and it will come, forward-thinking mortgage servicers will already have the right people, processes and technology in place to rapidly scale for spikes in delinquencies in order to meet demanding regulatory requirements, mitigate risk and preserve their reputations.