How the Pandemic Reinforced The Immutable Laws of Economics

GREENWOOD VILLAGE, CO – June 18, 2020 –While the longer-term impact of the pandemic remains to be seen, the mortgage market has settled down, with most industry players appearing to have weathered the storm, STRATMOR Group notes in its June Insights Report. Still, there is no doubt that the last few months have been difficult for lenders and servicers.

“When the pandemic erupted in March 2020, it created a massive chain reaction of aggressive policy responses, major disruptions in supply and demand dynamics in mortgage markets, and a host of unintended consequences,” STRATMOR senior partner Jim Cameron writes in the article “Some Things Never Change: Supply and Demand, Unintended Consequences and Cash is King.”

In the face of the disruption caused by COVID-19, the constants of market economics remain unchanged, Cameron writes. “The good news for the mortgage industry is that, on balance, the self-correcting nature of supply and demand has appeared to serve our industry well. The unintended consequences, while severe, are not life threatening to most lenders and servicers, with the possible exception of non-bank servicers that have a high percentage of loans in forbearance. And cash is still king.”

When market volatility kicked into high gear in March, “it was all hands on deck time” in the mortgage business, Cameron said, with “most short-run decisions laser-focused on optimizing cash flow and limiting the risk of events that would negatively impact cash, such as margin calls or  loan repurchases. There was a clear need to get loans sold and funded quickly, and lenders with agency approvals began selling to agencies as much as possible. While agency execution may or may not have been the best execution for lenders, the need for speed and warehouse line availability became paramount. Agency became the technique of choice to manage liquidity for agency-approved lenders.”

In addition, many lenders reverted to selling their loans on a best-efforts basis even when mandatory execution could have yielded a higher sales price. “Lenders wanted to mitigate the risk of large unexpected margin calls which might reduce cash to dangerously low levels,” Cameron writes.

Given the fact that investors reduced the amount they were willing to pay for loans in the secondary market, the only other primary source of revenue for lenders were the amounts collected from borrowers in the form of interest rates or fees. “Fortunately for lenders, current market conditions are enabling them to charge higher rates and fees, as lenders currently have little or no excess capacity,” Cameron said.

“The number of borrowers asking for and entering forbearance appears to be leveling off,” Cameron writes. “Concerns over liquidity for non-bank lenders have alleviated somewhat. And with rates at all-time lows, refinance transactions at very strong levels and purchase mortgage transactions slowly rebounding, mortgage originator profits are very strong right now, bolstering liquidity and capital levels.”

In a second article, “Sustaining Positive Performance Metrics as the Economy Reopens,” Mike Seminari, director of STRATMOR’s MortgageSAT Borrower Satisfaction Program, advises that lenders can get ahead of the curve by going back to the basics.

“Creating a delightful loan experience is the surest way to garner a client referral, and lenders can create that delightful experience by following the tenets of exceptional borrower satisfaction that seem to remain constant no matter how the economic or political winds are blowing.” For example, by calling borrowers to provide loan updates, lenders are rewarded with a Net Promoter Score (NPS) of 88. When a borrower must pick up the phone to request updates to their loan, NPS drops significantly to 11.

MortgageSAT data show that loan officers and processors have stepped up their communications game during the pandemic era. But even when the crisis subsides, Seminari advises lender to keep up the good communications, and offers tips to keep the momentum going. One of those tips is to measure and track performance on borrower satisfaction metrics, and then make efforts to improve them. “Utilizing a survey process and analytics software like STRATMOR’s MortgageSAT Program is a great first step in identifying incidences where critical rules have been breached and coaching employees at the regional, branch and even loan officer O and processor level,” Seminari writes.

 

Click here for the latest edition of STRATMOR’s Insights Report.