This piece originally appeared in the July 2024 edition of MortgagePoint magazine, online now.
Daren Blomquist
VP of Market Economics, Auction.com
In his role, Daren Blomquist analyzes and forecasts complex macro- and micro-economic data trends within the marketplace and greater industry to provide value to both buyers and sellers using the Auction.com platform. Blomquist’s reports and analysis have been cited by thousands of media outlets nationwide, including the Wall Street Journal, the New York Times, and USA TODAY, and on many national network broadcasts, including CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.
Q: What industry risks are keeping you up at night?
Blomquist: The persistent gap between actual home prices and affordable home prices based on historic price-to-income ratios. This gap has come down from its peak of around 30% in 2021, but it’s still at more than 20%—meaning actual home prices are 20% higher than the historically affordable home prices. While a low supply of housing has so far provided a cushion against this gap collapsing quickly in the form of a sharp home price correction, supply is slowly creeping back, and that leaves less cushion against a home price correction. Meanwhile, several looming threats could potentially pull out the cushion completely, including rising “hidden” homeownership costs of insurance and property taxes in many markets, rising delinquency rates for consumer debt such as credit cards and auto loans, and falling values and rising defaults in segments of the commercial real estate market.
Q: What loss mitigation changes are you anticipating and preparing for in the months ahead, and how so?
Blomquist: The pandemic disrupted the loss mitigation waterfall, mostly in good ways that benefit distressed homeowners, and we’re now seeing the long-term impacts of that disruption play out. In the shorter term, leading up to the election, I don’t expect major changes to loss mitigation programs unless there is a national or regional emergency that triggers emergency loss mitigation measures.
Following the election, I would expect a gradual movement toward a more efficient loss mitigation process in which distressed homeowners move a bit more quickly to a final decision on what loss mitigation solution is the best fit for them. This trend toward a more efficient loss mitigation process would be welcome given that more time spent in the loss mitigation waterfall itself (without arriving at a solution) results in more lost equity for distressed homeowners. Our data clearly shows this lost equity phenomenon.
Q: What is one area where servicing should be focused on innovating or improving, and why?
Blomquist: Providing distressed homeowners with a graceful exit that preserves the maximum amount of equity in the property when no loss mitigation solution is a good fit for that homeowner. This graceful exit, by definition, will involve a sale of the home, but it could incorporate flexible options that allow the homeowner to stay in the home for a period (i.e., lease back the property).
Benjamin Gottheim,
VP, Servicing Policy, Single-Family Portfolio & Servicing, Freddie Mac
Benjamin Gottheim joined Freddie Mac in 2010 after spending several years purchasing and servicing nonperforming loans in the private market. He spent his first couple of years at Freddie Mac managing its foreclosure and bankruptcy portfolio and since 2013 has been responsible for servicing policy at Freddie Mac. In his current role, he oversees the team responsible for creating sound servicing policies through the use of the Seller/Servicer Guide and TOBs. He and his team often work with FHFA and FNMA to create aligned servicing policies that are designed to promote better outcomes for borrowers and more efficient servicing practices and cost reductions.
Q: What are you most focused on right now, and how are you working to address it?
Gottheim: We continue to focus on improving the loss mitigation experience for the entire mortgage ecosystem. This encompasses improving loss mitigation policy, processes, and technology that benefit borrowers, servicers, and Freddie Mac while furthering our mission of sustainable homeownership.
We recently announced updates to the Flex Modification, our flagship modification program, which follows updates to the standard payment deferral program we announced and implemented last year. With these upcoming changes, we expect to see an increase in borrower eligibility as well as more equitable payment relief outcomes for borrowers who receive a Flex Modification.
These changes flow through to our processes and technology, including Resolve, our default management and loss mitigation platform. Working hand-in-hand with our servicers and their service providers and vendors, we aim to accelerate the adoption of these updates compared with past changes. Once implemented, servicers will be able to obtain near-real-time decisioning and terms from Resolve and provide near-real-time responses to distressed borrowers, reducing the time and stress that results from difficulty in making your mortgage payments.
The way in which we’ve rolled out Resolve—incrementally, focused, and through ongoing collaboration with servicers and service providers—has been one of the greatest servicing achievements I’ve witnessed in the 13 years I’ve been with Freddie Mac. Our goal is to use Resolve for all loss mitigation decisioning and settlement as soon as possible, potentially by the end of the year.
Q: What risks are keeping you up at night?
Gottheim: Not surprisingly, the risks that keep me up at night are the ones that, while out of our control, are those that we need to understand, qualify, quantify, and mitigate. The interest rate increases of the past few years, for example, have impacted borrowers’ ability to obtain new credit and investors’ cost of funding and loss mitigation. Additionally, since the pandemic, we’ve seen sharp increases in property tax assessments and rates as well as property insurance premiums.
We’re still in the early stages of understanding the long-term impacts on the mortgage ecosystem resulting from increases in the frequency and severity of natural disasters. It remains to be seen whether these events and their related insurance costs will eventually result in increased delinquencies and defaults.
Q: What problems do we need to solve as an industry?
Gottheim: We’ve seen a continual increase in servicing transfers, with most transactions transferring loans to nonbank servicers. We’ve made great strides over the years in facilitating these transfers to reduce time and friction for both servicer counterparties as well as Freddie Mac, and while some of these improvements have benefitted borrowers, there’s still far more work to be done.
A servicing transfer can still be difficult for a homeowner—especially a distressed borrower—and we need to find solutions to ease these pains.
One answer is the Mortgage Industry Standards Maintenance Organization (MISMO) transfer of servicing data standardization where Freddie Mac is a key participant, which looks to create data standards to streamline servicing transfers. Other solutions are needed to continue reducing these transactions’ risks for servicers and investors. Most important are initiatives to reduce the impact on borrowers, who are not a party to, or do not have any say in, servicing transfers. This is challenging work and will take a collective approach from every corner of the industry.
Jake Williamson,
SVP of Single-Family Collateral & Quality Risk Management, Fannie Mae
Jake Williamson is responsible for oversight and management of all end-to-end collateral, loan quality, and operational risk capabilities. These duties include front-end collateral policy design, loan quality control activities for both credit and collateral, condo standards, property valuations designation and modernization, appraisal bias oversight, real estate liquidation options, and Single-Family operational risk management.
Q: What are you most focused on right now, and how are you working to address it?
Williamson: Especially in this difficult homebuying market, we are continuing to advance our efforts to strengthen loan quality performance by improving the capabilities of our digital tools. In May 2024, we enhanced our Income Calculator to help mortgage professionals better serve the growing number of mortgage applicants in the United States who are self-employed and don’t have traditional sources of income. Using tax returns, our free, web-based Income Calculator calculates self-employment income before the lender submits the loan case file to Fannie Mae, providing lenders with an accurate, validated income amount for use in the underwriting process.
We’ve also recently introduced new Desktop Underwriter capabilities that enable lenders to automatically validate borrower assets, income, and employment using a single asset report. This not only improves the mortgage origination process from a loan quality perspective but increases our ability to identify rent payments and help that the use of appraisal alternatives on loans sold to us saved mortgage borrowers approximately $2.56 billion. We’re continuing to build on our lessons learned to help more homebuyers take advantage of appraisal alternatives in the future. We also recently announced a new reconsideration of value (ROV) policy, which standardizes elements that must be part of a lender’s ROV policies and procedures, as well as formalizes a framework for borrowers to appeal an appraisal when they believe the opinion of value is unsupported, may be deficient, or reflects prohibited discriminatory practices. This policy educates borrowers about their rights and the process to appeal an appraisal on their own behalf, creates uniform industrywide expectations for how to manage ROVs, and maintains appraiser independence.
Q: What is a recent “win” you or your team have celebrated? What lessons did you take away from this achievement?
Williamson: In 2021, Fannie Mae introduced an annual appraisal text scanning review process that allows us to identify the use of terms in appraisal reports that are explicitly prohibited per our Selling Guide (B4-1.1-04) policies. In that first year, we sent education letters to more than 1,500 appraisers, alerting them of violations. The following year, about 79% of the appraisers who received a letter in 2021 had no new findings. In 2023, 91% of
appraisers who received a letter in 2022 had no new findings. This is also reflected in the overall occurrence rate, which declined from 0.15% of appraisal reports in 2021 to just 0.03% in 2023.
These statistics show remarkable progress, and we’re continuing to identify new educational opportunities in appraisal reporting. In 2023, we expanded our text scanning to include language that may infer consideration of protected class along with additional cases of subjectivity or unsupported assumptions, sending more than 1,900 feedback letters. Education is an essential part of our appraisal monitoring and quality processes and a key pillar of our overall initiatives to continue to mitigate appraisal bias. This includes industry research, valuation modernization, technological innovations, and expansion of the Appraiser Diversity Initiative, which is designed to attract new entrants to the real estate appraisal field. Importantly, addressing appraisal bias remains a concerted effort among a number of industry participants, including the Federal Housing Finance Agency, the U.S. Department of Housing and Urban Development, and Freddie Mac, and we’re excited about the continued progress appraisers have made to become more objective in their reporting to eliminate unsupported assumptions and consideration of protected class.
Q: What is one area where servicing should be focused on innovating or improving, and why?
Williamson: An essential component of Fannie Mae’s mission is to support sustainable homeownership. That includes providing borrowers experiencing unforeseen financial challenges with loss mitigation options, such as mortgage forbearance, loan modification, and payment deferral.
We recently announced enhancements to our flex modification terms, which expand borrower eligibility and provide more equitable payment reductions to eligible borrowers, underscoring our focus on home retention strategies that enable borrowers who are facing a long-term hardship to remain in their homes. We remain committed to ensuring our retention workout options provide appropriate borrower assistance regardless of the economic environment while also managing our book of business responsibly by reducing defaults and mitigating credit losses.
Mortgage servicers play a key role in that commitment, communicating with borrowers throughout the lifecycle of their loans and providing assistance when needed. Like many other industries, servicing communication tools have been modernized to provide multiple consumer engagement capabilities and digital touchpoints. Instead of relying on phone calls and mail correspondence as the only way for a borrower to discuss their loan with their servicers, they are now able to connect via text message, live chat, or an app. Servicers have also deployed self-serve options that allow borrowers to move through the servicing loan life cycle, which improves the user experience and provides efficiencies and cost savings for servicers. Borrowers who are experiencing a financial hardship that may impact their ability to pay their mortgage can learn about loss mitigation options and, in many cases, sign up for a loss mitigation solution directly from their mobile app or tablet. Additionally, AI communication tools provide a path toward achieving fair servicing by using data-driven insights to identify disparities and mitigate risks.
