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Amid Considerable Pressure, the Mortgage Industry Innovates

Client Partners Amid Considerable Pressure, the Mortgage Industry Innovates

Amid Considerable Pressure, the Mortgage Industry Innovates
By Jim Daras, President and Chief Executive Officer

As we all know, the mortgage industry weathered an interesting period of frenzied refinance and new homeownership activity in 2020 and 2021, with the vast majority of mortgages in the U.S. either refinancing or originating in the 2.5% to 5% range.

The frenzy capped the long decline in interest rates that started in the mid-80s. That era ended in 2022, and we’re now at a 7-plus percent mortgage rate for the first time in more than 20 years. In fact, during those 20-plus years, we’ve seen refi after refi boom, as rates — with little interruption — continued to drop. Mortgage originators of all types geared up for those unending rounds of refinancing, and now have capacity and very little demand.

Because of this, there’s a good deal of disruption going on. We have seen and will probably continue to see consolidation in the industry. Sadly, a lot of smaller companies have closed their doors to look for other opportunities. Many others opted to join forces with former competitors.

We’re also facing a very different economic environment from what we’re used to; relatively robust economic growth, high-but-moderating inflation and, most recently, some talk among economists about significant advances in productivity. All of these are positive signs for a soft landing, but they may also keep the Federal Reserve in the fight to continue to control inflation.

The Fed’s inflation fight has been intense, more so than even the Volcker regime in the early 80’s. There’s been lots of discussion about whether monetary policy can really fight inflation with roots in extraordinary fiscal stimulus. We all love to engage in that argument as interest rates dominate our industry and our thinking.

One could argue that the Fed seized a rare opportunity, considering economic and interest rate trends since the early 2000s, to bring rates back to a level where they now have the ammunition needed should a real recession arise. Bravo! At zero rates and with Quantitative Easing-generated large balance sheets, the Fed had to be constantly wondering how they might fight the next recession. Well, they certainly have some tools back in their arsenal now.

So, what’s all that mean for the industry? Starting with the production side, we have to wonder if 7% mortgage rates help put people in rentals rather than homes they really can’t afford. Harsh, but a reality of the economic policy executed to tame inflation. Rates may drop back some, but 6% and higher mortgages are likely here to stay for an extended period of time, offering little refinance opportunity. It is also likely to keep secondary housing market sales low due to the realities that a seller today may not be able to afford a replacement home. Consequences: more consolidation on the origination side, lower overall new volume for an extended period and the big guys with operating efficiencies likely winning.

On the servicing side — unlike the front-end originators who embraced technology change to combat competitive pressures years ago — there is a world of opportunity in tech-led efficiency gains. Dominated historically by banks and manual back-office operations, servicing is just starting the journey away from that manual core. Given the intensity of post-2008 consumer financial protection initiatives, servicing now also has the regulatory risk management framework overhead pushing in the opposite direction on the cost side.

Capital plays a huge role here. Money raised is enabling complete new looks at systems supporting servicing activity and giant transactions involving the major industry systems providers. Layer on top of that the capital supporting the aggregators of servicing rights outside of the banking industry.

Only recently and reluctantly have servicers turned to technology and automation to drive operating efficiencies and reduce compliance and operational risks. Arguably, the emergence of subservicers — an outsourced function only truly relevant post-2008 — together with the capital that’s pushing alternatives has created the competitive environment that demands those operating efficiencies and risk management solutions.

Cenlar dominated the subservicing business after 2008 with capacity and a 50-plus-year experience base in portfolio conversion and the basic business of servicing. Our hats are off to the competitors that have arisen in the past few years, meeting and prospering in this intensely regulated business, and suffering but driving through, as we do, the often-costly interaction with our partners on the regulatory side of the business.

My plug for Cenlar is that our team across Operations and Technology is quite formidable and will define the future of our industry. Chief Information Officer Steve Taylor leads our technology team with Chief Digital Officer Josh Reicher directing automation and digital adoption efforts. Lou Sigillo, SVP, Borrower Operations, runs our call center and Bill Moffett, SVP, Loan Operations, leads default, core operations and transfer operations. I get to claim them as the best in the industry. With the strength and expertise of our talented leadership group and a focus on innovation, we will be leading the way once again.

With the strength and expertise of our talented leadership group and a focus on innovation, we will be leading the way once again.

There are a lot of advancements in learning how to execute in this regulatory environment, all those rules and controls and things that govern our everyday life. We live under a matrix of federal, state, agency and client rules. It’s very difficult for any individual to know what they all are, or even what the ones are that affect you in your particular function, but as a servicer, that’s our role and we excel at it. Technology enables us to codify those things, and put them in pop-up reminders and queues across the function. People have to rethink the various functions in servicing with a mind toward process re-engineering. As we are often stating around here at Cenlar, THINK about your process, your technology, and how to serve clients, homeowners and fellow employees. It is a winning formula to THINK about enhancing each of the servicing functions, one by one.

As we enhance our technology at Cenlar, we’re turning our own process from one of dealing with every transaction to one of dealing with the exceptions. When you deal with the exceptions, it’s a more fulfilling experience for employees. They’re more involved, and you’re relying more on their expertise and talent to solve problems in a more strategic way. Answering the phone and saying, “Yes, your insurance was paid this month,” or, “Yes, we paid your taxes,” is less engaging and requires less analytical work than helping a homeowner who wants to know why the payment on their adjustable-rate mortgage went up. You have to dig in and do research to figure it out. It’s a much more fulfilling job experience.

The development of bots is also key in allowing this transition to occur. We’ve had IVR and the call center for decades, but now we also have bots that can execute a lot of the basic activity. At Cenlar, our bots handle nearly 150,000 interactions every month. Of those homeowners who interact with our bots, more than 85% get the help they need without ever needing to interact with a live representative. Simple, true, perfectly traceable and fulfilled with speed.

Clearly, homeowners have welcomed this shift. People today are far more accustomed to getting their answers in a digital format, whether that’s on the web or on an app on their phone. There’s a much higher level of digital adoption, with Cenlar leading the way. [You can read more about this later on in this issue.]

We’re providing homeowners the ability to work with us whenever, wherever and however they choose. Servicers, historically, haven’t innovated like this. The mortgage origination business is driven much more by public and private capital demanding returns, an environment of high production. Investing the dollars in a better mouse trap — sinking money into technology — paid off in a big way. In that business, everyone has have the ability to look at their smartphone to see if they qualify for a loan. Most documentation can be done electronically, as can signatures and recording.

Servicing just didn’t have that kind of motivation. It’s mostly influenced by the big banks, and they were slower and driven by pure profitability. A lot of them have now adopted things, but it’s not a perfect machine yet.

That’s why, at Cenlar, we’re confident that as we transform our organization we’re also modernizing mortgage servicing as a whole. We’re still early on in this transformation, but the potential is immense.

We’ll emerge from this tough period for the mortgage industry stronger and renewed.

Jim Daras is President and Chief Executive Officer at Cenlar FSB.