Ancillary services get a boost as originations, defaults rise
The companies that provide mortgage lenders with title agent, appraisal and other ancillary services could be busier than ever over the next few months, as both originations and defaults surge.
Interest rates are likely to continue going lower, according to Fannie Mae Chief Economist Doug Duncan. In Fannie Mae's July housing forecast, he predicted the 20-year fixed mortgage rate to average 2.9% in the fourth quarter and then continue to fall over the next three quarters, reaching 2.6% in the third quarter of 2021.
Those low rates, while attracting purchasers into the market, should continue to drive refinance demand; Fannie Mae projects $1.9 trillion in refis this year and $1.1 trillion next.
But purchases aren't going away either: Duncan forecast $1.26 trillion this year, down slightly from $1.29 trillion in 2019. For 2021, his current estimate is $1.28 trillion.
And while most borrowers are expected to resume paying their loans after the COVID-19 forbearances end, a significant number are likely to default.
As a result of these conditions, the ancillary services below will be ramped up, possibly more than ever before.
Because rates aren't expected to rise materially in the next year, "origination-related products are going to continue to grow," said Mike Rawls, CEO of Xome, a mortgage and valuations provider, title insurer, listings portal and auction house.
Xome has over 200 clients, although its largest remains parent company Mr. Cooper, with 51% of Xome's revenue currently coming from originations, said Rawls.
Given the rise in originations and potential lockdowns in the fall, Xome has been making investments in hybrid appraisal products, he added.
"On the valuation side, the one thing the pandemic has done is it's been a bit of an accelerant in moving the industry away from traditional appraisals," Rawls said.
Other companies are expanding into the appraisal business as well. In June, Stewart Information Services, whose main business is underwriting title insurance, acquired United States Appraisals, an appraisal management company.
Prior to the merger, Stewart had its own appraisal business; but between that and U.S. Appraisal, there is little overlap, said Aaron Fowler, the co-founder and former CEO of U.S. Appraisal, who is now senior vice president of valuation services for Stewart. For now, the appraisal units remain separate operations.
"Their consumers are primarily home equity lenders, so the combination is a more well-rounded and scalable solution for Stewart's customers," said Fowler.
Because of the pandemic, and a relaxation of the secondary market's appraisal rules, U.S. Appraisal launched a mobile application called Valuguard Home Inspection.
"It allows our borrowers to conduct a self-service home inspection using their smartphones [and] guides them through the process," Fowler said.
The consumer can do the work in about 15 to 20 minutes, he said. "Very importantly, it validates the data, using geolocation technology and time-stamping the photos," he added.
Even though default is not U.S. Appraisal's primary focus, Fowler expects an influx of distressed loans — and the company’s tools can be useful there, too.
"I think some of the innovative solutions like the Valuguard app that we developed for GSE appraisal flexibility, there are applications far beyond that, including servicing," he added.
Loss mitigation support
With many unknowns regarding governmental extensions on forbearance and other measures, servicers are preparing for a wave of defaults that could strike at any time.
"What we see on [in residential] is it's really important to stay nimble. The rules continue to change, and they've changed pretty markedly, pretty rapidly," said Michael Franco, CEO of SitusAMC. The real estate consultancy company operates in both the residential and commercial markets; in the latter category, it is also a loan servicer.
While some servicers may employ automated tools to assist with customers, others may opt to bring on more staff to augment their own personnel.
Mortgage lenders have turned to business process outsourcing companies such as MetaSource and LenderLive — which is being rebranded to reflect its ownership by Computershare Loan Services — on a short-term basis in order to deal with bottlenecks arising during times of heavy traffic.
SitusAMC has been talking to its clients about their pain points and working with them to determine COVID-19's impact on their operations, added Tom Britt, executive managing director and head of residential real estate.
"Certain servicers had off-shore operations that ceased because of the lockdown in India and other nations. And then the move to remote from facilities was also tough for a lot of our servicer clients, whether they were banks or non-banks, smaller servicers," Britt said. "We worked with them either to outsource certain functions, or as Michael mentioned, the staff augmentation piece."
The nonresponsiveness of servicers during the housing crisis, in large part due to staff shortage, left many observers and consumers with a negative impression.
"Especially within the banking communities there's a great appreciation for the political blowback that they got in the Great Recession," Franco said. "Nobody is for a replay of that. So we're seeing institutions really trying to get out in front of it, looking for staffing solutions now, [and] trying to be seen as being very accommodative to the consumer."
When it comes to the title business, automation is increasingly used, and could be handy when dealing with an onslaught of originations.
Xome has a proprietary decision-making engine that is allowing it to give lenders a clear to close almost instantaneously on over 40% of its orders.
"That's essentially removing 40% of our work and allowing us to focus on stuff where we really got to dig in to clear title," said Rawls.
But as originations stay at high levels, the default business will ramp up as well, which is a unique situation.
"Having both of those going at the same time I think is going to put some real stress on the operation for a lot of the mortgage companies because they're going to have difficulties moving resources from one side to the other," said Rawls.
SitusAMC owns a title firm called String Real Estate Information Services, and it is talking to servicers and getting the various products for default situations in front of them, Britt said. AMC [then known American Mortgage Consultants] acquired String in March 2019, before its merger with Situs in June of that year.
Through its collateral and asset management division, it provided valuations including broker price opinions.
Still, it is a bit of a political football on exactly when the forbearances will end. And as a result, everyone is "waiting for the log jam to break," added Franco.