Mortgage servicers should expect reliable profits in 2019, but origination challenges may spill over into their sector in the form of operational complexities and higher costs.
Servicing portfolio runoff could decrease and mortgage servicing rights valuations could increase in 2019 in ways that bode well for servicers, but continuing constraints on originations also could make their work more complex and expensive.
More home lenders could sell off their servicing
Among other things, servicers may have to juggle more secondary market transfers of servicing rights.
"There are a lot of servicing trades right now," Kevin Brungardt, CEO of RoundPoint Mortgage Servicing Corp., said in an interview. "Production is down and the refi boom is kind of over. You're seeing a lot of mortgage servicing rights portfolios trade off, and lot of monoline lenders are looking for operating liquidity."
That's likely to only intensify next year. Most forecasts call for higher rates. That could further diminish loan volumes, and put more pressure on nonbank lenders to sell or finance servicing.
"Depending on whom you believe, the Fed is apt to hike two to four times over the next 12 months and the 10-year Treasury yield could go back to some kind of normalized level," said Brungardt. "Mortgage servicing rights are a very valuable asset, and you're seeing a lot of hurt and pain on the lender side of the business. But if you have a servicing position, it could be a good year."
There may be more stress on subservicers' budgets
For subservicers, an uptick in transfers next year as lenders release more servicing or consolidate could make their work more complex, and costly.
Subservicing work might be more complicated because clients that retained historically, and are starting to sell, will only need subservicers to handle their servicing in the short-term, from after origination until it is sold.
"A transfer, depending on where you sit, may or may not be good for your business," said David Vida, executive vice president at Specialized Loan Servicing, a subsidiary of Computershare.
So can companies make money as an interim servicer?
"People need to pay you the right amount of money to board and de-board a loan. That's where automation, technology, and a smart process make a huge difference," said Vida. "It's a thin-margin business. Our challenge is how to provide a strong customer experience while spending less money."
The need to service second mortgages could grow
Another trend subservicers will have to contend with in 2019 is demand to service the growing number of home equity products lenders are expected to originate if rates and home prices keep rising.
"Next year could be the year of home equity," said Gagan Sharma, president and CEO at BSI Financial Services. The product is more complicated for monoline servicers to handle than traditional mortgages because of the mix of short-term draws and longer-term withdrawals that may be involved.
While most servicers and subservicers are largely expecting a continuing climb in home equity business as home prices and rates rise; they tend to also agree there are a couple of risks to this forecast.
The economy may be overdue for a downturn
One common concern is that the length of the recent economic expansion suggests it is due for a reversal.
"I worry about the economy," said Sharma.
Among developments that could weaken the market's strong housing and loan performance, or lower rates, are global turmoil, excessive damage from natural disasters, the spread of local housing bubbles, or excessive consumer debt.
"I don't believe the housing market will be the cause of the next downturn, but if there is ever a downturn the housing industry will definitely be impacted," said Sharma.
Mortgage delinquency rates could bottom out
So far, however, there is little sign of any deterioration in mortgage credit at Fannie Mae, the largest secondary market buyer in the market.