Servicers of all types of loans are on the front lines of the economic collapse Notwithstanding that, for once, we are living through an economic crisis that didn’t start in housing finance, the experience of mortgage servicers during and after the Great Recession holds important for all loan servicers in the current environment.
Roots of the foreclosure crisis
Like all financial crises, the mortgage foreclosure crisis of the Great Recession was a complex affair. Thoughtful veterans can tell its story in many ways, but from where I sat, it seemed to stem from a confluence of four circumstances:
We had an underwriting problem: lots of mortgage loans went out to people who, for a variety of reasons, ultimately could not afford their contractual principal and interest payments. Others who could make P&I payments chose not to, usually because they saw no value in paying off a mortgage on a property that was underwater.
We had a cognitive problem: although various analyses foretold the crisis, industry leaders and regulators discounted the predictions and failed to react. Blinded by their own experience, they failed to read the writing on the wall as a call to action.
We had an operational problem: having failed to prepare their systems and processes adequately, servicers were overwhelmed by the volume and complexity of borrower interactions they needed to handle .
Finally, as the crisis continued, the government introduced a proliferation of new and rapidly evolving regulatory requirements and programs, all intended to help borrowers. These introduced heightened complexity into the servicing environment, multiplying opportunities for operational and compliance errors.
Aftermath of the crisis for mortgage servicers
We all know what followed for the mortgage servicers: nearly a decade of well-publicized enforcement actions, civil litigation, and unending settlements of unprecedented size. But families have defaulted on mortgages in large numbers in the past (think Texas in the 1980s or Los Angeles in the 1990s), and servicing errors are nothing new. Why did this particular cluster of offenses generate an unprecedentedly strong a reaction from the public sector? I would point to three factors in particular.
First, despite public debate about the borrower population’s level of culpability in the foreclosure crisis, the regulatory community came to see the affected borrower population as broadly sympathetic, significantly composed of borrowers who had been sold inappropriately risky credit products by lenders who should have known better, and whose household finances were jeopardized as a consequence.
Second, mortgage servicers as a group were inconsistent in their response to the situation. Some institutions tried hard to give their borrowers a variety of forbearance or modification options, but others initially took hard lines. The hardline positions, widely reported in the media, inflamed Congressional and regulatory attitudes and overwhelmed perceptions of those institutions that were more constructive towards borrowers.
Third, even servicers who tried to do the right thing were unprepared and overrun. As the volume of borrower demands outstripped their capacity, normal operations grew increasingly chaotic. Servicers made all kinds of operational errors, miscommunicating with borrowers, losing borrower information, failing to follow up as promised, incorrectly decisioning files, and so forth. Many of those errors violated no laws, but they fed a widespread perception of insensitivity to legitimate borrower needs.
Implications for servicers in the current crisis
If the economic environment for mortgage servicers in the Great Recession was bad, today’s environment is shaping up to be worse for servicers of all types. With unemployment already approaching three times the levels of a decade ago, far more households are suffering. And this time, there is little debate about borrower culpability: the virus is the culprit, those whose finances have been hurt are its innocent victims. And the policy response has already been swift and far-reaching. Although the economic downturn has just started, federal and state rules and expectations for servicer accommodations of distressed borrowers are already proliferating.
Against this backdrop, servicers should expect and prepare for a high degree of public, media, congressional, and regulatory attention to their handling of borrowers. The fate of mortgage servicers in the years following the Great Recession provides a cautionary tale with current relevance for any servicer who fails to act quickly and responsibly to prepare for the inevitable regulatory aftermath of the current crisis.
Here are four practical steps I would recommend to any loan servicer who hasn’t already taken them:
First, look now at your forbearance policies, procedures, and programs and consider how they will be viewed, not just in today’s environment, but in the economic environment to come. We are looking at a period of widespread suffering, with a significant fraction of the workforce unemployed. Policies and practices that are appropriate during normal times may feel harsh or unreasonable in the context of a severe economic downturn. In a similar vein, review your call center scripting. Make sure the words your customer service agents use are as empathetic and kind as they can be.
Second, look hard at your servicing operations and expectations.
If borrower interactions increase by a factor of several, can you scale up your servicing capacity commensurately - if necessary, while working remotely?
Can you maintain acceptable quality standards? In the mortgage crisis, many servicers de facto managed call volumes by inducing borrowers to hang up in frustration. From a reputational and regulatory perspective, this proved a poor strategy.
Do you have appropriate call monitoring technology and processes in place? Are they appropriately independent of call center management? In the foreclosure crisis, numerous servicers lacked the technology, monitoring processes, and critical oversight that might have enabled them to see in real time what borrowers were being told, and whether appropriate follow-up was occurring. As a consequence, senior executives and boards sometimes didn’t understand the magnitude of their operational challenges until well into the crisis.
Third, take a hard look at your compliance operation. It, too, may need to scale up commensurately with surging borrower forbearance demands. While it’s fair to say that the current administration has to date been less compliance-focused than preceding administrations, it is risky, at best, to expect any administration to be indifferent to compliance and operational failures in a world in which the suffering of a large, sympathetic, and bipartisan borrower population is manifest.
Fourth, take a hard look at your complaint management process. Complaints are often the trigger for negative media attention and regulatory enforcement actions. Is it easy for your customers to make a complaint? Do you have clear SLAs for timely complaint response? Are you adhering to them? Do you follow up with customers to validate their satisfaction? And - critically - do you have a plan to scale your complaint management operations appropriately if the need arises? Every company has customers that simply can’t be satisfied no matter what you do, but the better your ability to identify and resolve legitimate complaints internally, the fewer borrowers will feel the need to vent their unhappiness on social media, or to members of Congress, regulatory agencies, or the state attorneys general.
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All of this is easier said than done in today’s environment, to say nothing of times ahead. The first inclination for any business during adversity is to pull back and cut costs, not to invest further.
But the experience of mortgage servicers in the past crisis amply demonstrates that failure to take timely steps to plan ahead can make an inherently bad situation astronomically worse. Make the necessary plans and investments now, augmenting your team as necessary to prevent future problems and reduce the likelihood of future scrutiny. Your shareholders and customers will thank you.