How Smart Fintech Allows Fast Lender Diversification as Refi Boom Wanes

This article originally appeared in DS News’s 2021 Black Book edition (p. 7) here by Sagent CEO Dan Sogorka.

No question, 2020 is one for the ages. Final 2020 origination volume ended up around $3.57 trillion, and we’re servicing about $11.1 trillion in outstanding mortgages.

But in 2021, we’ll have $1 trillion less in refis, and over 5% of loans in maturing forbearances. The smart reaction to less origination volume is to diversify into servicing. To help you succeed here, let’s break down 2021 servicing dynamics, starting with the market outlook.

2021 & 2022 Mortgage Outlook

MBA data shows we closed out 2020 with a whopping $3.57T for total mortgage origination volume, with 60% ($2.15T) of that from refinances. 

Volume will drop to $2.72T in 2021, with 58% ($1.57T) in purchase loans and 42% ($1.15T) in refis.

That trend continues in 2022 with refis at just 26% ($573B) of the projected $2.20T total volume.

Meanwhile, on the borrower hardship side, we begin 2021 with about 2.7 million forbearances, 80% of which have been extended. CARES relief allowed for two 180-day increments of forbearances, and defaults may rise as that relief ends in April.

And it’s still fairly quiet in the mortgage servicing rights (MSR) market, with just $70.8B in MSR transfers for 3Q2020, the lowest since 2015 per IMF. 

MSR values have fallen by two-thirds the last two years as dropping rates fuel prepays and capacity constraints prevent rates from truly bottoming.

But now is the time for strategic lenders to start gathering MSRs.

The Originator-Servicer Playbook For 2021

We’ve got a K-shaped economy in 2021 where you must optimize rates for strong borrowers or lose them. And you also must care for and stabilize strained borrowers.

The intuitive part is adding origination volume by refinancing those strong borrowers, retaining that servicing at record low rates, then benefitting as MSR values rise with rates. 

The harder part is that defaults will also rise as strained borrowers fail to recover and policy relief runs out. 

But you must do both if you’re going deeper into servicing — or if you’re an originator who wants to diversify into servicing.

Rocket is a good example of this playbook. They’ve told Wall Street they plan to service most of their 2021 originations to “thrive in all market conditions.” 

For perspective, the latest public data shows they originated $213B through 3Q2020, so even as higher rates cause this to wane for them — and for the industry as a whole — retaining your servicing is a smart offset.

The value of that servicing rises with rates, and you get to own the lifetime customer experience. 

So how do you get equally strong at performing AND non-performing servicing fast? 

Unlike the last market cycle, technology is now at the core of your strategy to retain performing customers and care for non-performing customers, all while maintaining compliance and profitability. 

A modern, consumer-first servicing tech stack must have three things: 

• Servicing system of record: Must handle collections, accounting, escrows, investor management, and customer care.
• Default management system: Must handle loss mitigation, foreclosure, bankruptcy, claims, REO, and litigation.
• Customer care and retention system: Must provide a bank-on-your-phone experience to manage loan(s), monitor home equity, get real-time loan offers, and get immediate hardship help. 

The era of consumer-first servicing modernization is finally here to meet these three prerequisites. 

And modern servicing now finally makes it possible to have a subservicing strategy that doesn’t wreck your customer experience.

The secret sauce is executing your servicing strategy with all three tech prerequisites above at once. Stitching it together leads to customer experience, regulatory, and profitability challenges. 

Good luck as you lean into servicing in 2021, and stay tuned as I dive deeper into the servicing fintech playbook in the coming weeks and months.