Servicers are bracing for a challenging future where the way they redefine their risk-pricing measures will determine their ability to survive.
What makes the challenge unprecedented, Mortgage Bankers Association’s chief economist Jay Brinkmann said at the National Mortgage Servicing Conference held in Dallas recently, is a business environment where lenders are forced to take risks they have no control over.
“We’ll see more risk pricing,” he said. But the real question is: Will that solve the problem? Is the problem really in the credit models used so far or in the economic factors? Even more importantly: Are local economic factors taken into consideration to ensure they are part of the equation in the new credit criteria?
Brinkmann warned that developing new parameters that help evaluate the cause-and-effect dynamic of how local market conditions are driving the performance of the housing market will in return help determine and detect the main features of the expected recovery.
As to what kind of recovery expectations would be realistic given current conditions, Brinkmann reaffirmed what most economists have been forecasting in the recent past. “Getting back to normal” will mean seeing significant improvements at the state level, both in the better-performing states and the hardest-hit states like Florida.
Currently up to 52% of all loans in the U.S. currently are in foreclosure proceedings. Plus the inventory of homes for sale and the shadow inventory together account for about 8 million properties the market needs to absorb while appetite for homeownership has shrunk to its lower level ever.
Right now housing demand has shifted in favor of rental housing. Brinkmann argued that even if economic growth is under way it is unclear how or will it transform into jobs that eventually will lead to household formation and new homeownership demand. Therefore the trend of more people deciding to rent will continue.
Beyond employment rates and the dried-up demand, credit-tightening measures add to the reasons that are putting “sand in the gears” of the housing recovery, he said.
Uncertainties about Fannie Mae and Freddie Mac’s future, changes in the GSEs’ buyback policies, overall more extensive loan document requirements, detailed appraisal reviews and requests for multiple appraisals and fraud checks, and “outright refusal of deals that are outside the norm” make up an even longer list of daily challenges servicers will continue to deal with in the near term.
Brinkmann finds the application of an “extremely tight “credit rating model implemented by the rating agencies combined with the ongoing debate about the future of qualified residential mortgages and the Dodd-Frank requirement that originators retain 5% of the risk on all loans they originate, bring forth unexpected and not so easy to track consequences.
Attendees’ questions indicate increasing concern among servicers and are in line with wider industry challenges that are pressing servicers to reinvent their business strategies and redefine their role in the housing recovery.
Brinkmann’s rhetorical question: “Since when is home retention a servicer’s concern?” received spontaneous applause indicating many servicers are overwhelmed by performance expectations bestowed upon them.