When the mortgage crisis peaked in the first quarter of 2010, more than one in every seven mortgages in the U.S. were either a month or more past due or in the foreclosure process. Faced with this unprecedented number of delinquent loans, and pressured by regulators and investors to provide better, more responsive service to borrowers seeking some alternative to default, servicers were forced to throw bodies – lots of them – at the problem.
Thousands of employees were added to servicers’ payrolls, many of them in roles responsible for outreach to delinquent borrowers. These weren’t just bill collectors; if payment could not be arranged, servicers were required to qualify the borrower for a program designed to avoid foreclosure; such as payment forbearance due to a temporary hardship or a loan modification to bring the monthly payment into reach of their budget. If neither of these options would work, the servicer would negotiate with the borrower to determine the best path to help the borrower exit the mortgage as gracefully as possible. These negotiations were lengthy and complicated, requiring servicers to implement extensive training and quality control programs to insure borrower’s rights were protected and an increasing variety of new regulations were complied with.
By most objective measures, the investment paid off. Slowly but surely, aided by an improving economy along with various government and investor supported loan modification programs, loans in foreclosure and mortgage delinquency have returned to historic norms.
But there is one key performance indicator that has not recovered. According to a Mortgage Bankers Association and Urban Institute report, the cost to service a performing loan increased from $59 to $158 per loan per year from 2008 to 2014. The non-performing loan costs rose even faster, peaking at $2,357 per loan in 2013 before coming down to just under $2,000 per loan in 2014 (but still over four times higher than in 2008).
The key culprit? In the same timeframe, the number of loans a servicer employee can handle has dropped from 1,638 to only 706. In other words, given the increased complexity of the job, it takes more than twice as many employees to service the same number of loans in 2016 as it did in 2008.
Relief is on the way
Perhaps concerned about the risk this cost inflation has put on the servicing industry’s viability, and also recognizing the significant reduction in delinquency rates, FannieMae and FreddieMac, the government sponsored entities (GSE) that facilitate the financing of the majority of U.S. mortgages, recently revised their servicing guidelines with respect to the requirements for reaching out to delinquent borrowers.
Where the GSEs previously required phone calls to begin as early as the third day of delinquency and to continue every three days until contact was made with the borrower, the new guidance issued in December 2015 allows the servicer to delay treatment until the 36th day of delinquency and to make attempts only every five days. By providing increased flexibility in determining when to begin the collection process and reducing the frequency with which they must pursue the borrower, the GSEs are allowing the servicer to right-size their efforts to match the risk posed by the specific borrower.
Just as significant is an acknowledgement that outbound phone calls from a call center agent, no matter how well trained, might not always be the best way to reach a borrower in distress. When announcing the rule change, the GSEs added:
“To conduct outbound contact, Servicers may use alternative contact methods to reach the Borrower as permitted by applicable law including, but not limited to, e-mail, text messaging or voice response unit (VRU) technology.”
This is a welcome, if somewhat belated recognition of the utility of digital communication channels in borrower outreach. And it’s not just that the enabling technology is capable of both communicating and in many cases, resolving complex or sensitive issues. Studies have shown that consumers often prefer to use self-service options rather than discuss their financial situation with a stranger. Automated communications are non-threatening, won’t annoy those who are simply forgetful or experiencing a temporary cash flow problem, but are also capable of opening a dialog with a borrower who needs the assistance of an experienced agent.
Your borrower’s phones have gotten smart…have you?
Since over seventy-five percent of U.S. consumers carry a smartphone capable of engaging in any or all of these channels, these digital communications are also much more likely to reach and engage the borrower than a phone call to their landline that reaches their answering machine or a piece of postal mail that ends up in their trash. Even better, email, text and interactive voice messages are a much less expensive way to establish the quality right party contact required by the GSE guidelines.
Servicers who have begun using these lower-cost channels are seeing expense reductions of 30 to 75 percent per borrower contact. They’ve also extended their use beyond collections to engage borrowers throughout the mortgage lifecycle. Welcoming new borrowers and those acquired in a servicing transfer is an excellent place to start. So is keeping distressed borrowers seeking a loan modification informed of the status of their request for assistance.
Servicing costs may never fall back to their pre-crisis levels. There are just too many more “must do’s” required by regulators, investors and guarantors for that. But that doesn’t mean nothing can be done. Adopting alternative contact methods now is a key “first step” to turning servicing back into a profitable business.