This article originally appeared in the April 2025 edition of MortgagePoint magazine, online now.
With delinquencies at an all-time low, lenders that have retained servicing have enjoyed healthy returns on their portfolios, providing a needed boon to overall profitability as originations stall out in anticipation of further rate cuts.
However, larger economic factors are impacting the delinquency rate, thus jeopardizing this vital revenue stream. Consider the unexpected wallop of Hurricane Helene in western North Carolina, where nearly 600 roads were closed, making repairs and rebuilds impossible and providing the kind of hopelessness that stokes foreclosures as exhausted homeowners walk away without obtaining assistance.
Soon thereafter, Hurricane Milton and the tornadoes it spawned devastated many parts of Florida, some of which had also been severely damaged by Hurricane Helene. Earlier this year, wildfires in Southern California only added to the devastation wrought by severe weather events in the United States, with total economic losses estimated at $50 billion. With insurers pulling out of these two states in particular, there may be little incentive for homeowners to rebuild, thus potentially compounding possible foreclosures.
Of course, natural disasters are but one factor that can influence the delinquency rate. Rising prices on consumer goods will most certainly stretch many existing homeowners economically, and recent data shows that unemployment is on the rise, which is often a leading indicator for delinquencies. Given these unknowns and how expensive distressed servicing can be, lenders must seek ways to drive down the cost of servicing non-performing loans and build a sustainable model should the situation worsen.
The Composition of Loans in Delinquency Is Changing
According to the Mortgage Bankers Association’s (MBA) National Delinquency Survey (NDS) for Q4 2024, the delinquency rate for the quarter increased to 3.98%, up six basis points (bps) from Q3 and 10 bps year over year.
As Marina Walsh, MBA’s VP of Industry Analysis, noted: “Although mortgage delinquencies rose only 10 basis points in the fourth quarter of 2024 compared to one year ago, the composition of the delinquencies changed. Conventional delinquencies remain near historical lows, but FHA and VA delinquencies are increasing at a faster pace. By the end of the fourth quarter, the spread between the FHA and conventional delinquency rates reached 841 basis points, while the VA and conventional spread was 208 basis points. Government loans are also rolling to later stages of delinquency. Compared to one year ago, the seriously delinquent rate rose 70 basis points for FHA loans and 57 basis points for VA loans, but only two basis points for conventional loans.”
It is worth pointing out that the previous significant upward trend in foreclosures began nearly four years before the peak in mid-2009. Thus, the dramatic shifts in delinquencies in the government lending segment combined with rising foreclosure rates could be a harbinger of what is to come.
Given these increases, it is unsurprising that the MBA’s Quarterly Mortgage Bankers Performance Report for Q3 2024 showed a reversal in net servicing financial income, which dropped to a loss of $25 per loan versus a gain of $69 per loan in Q2. Increased prepayments during Q3 led to impairments in mortgage servicing rights (MSRs) and, thus, reduced servicing profitability.
Technology to the Rescue
While the loss of much-needed servicing revenue would undoubtedly be a bitter pill for lenders to swallow, the cost to service non-performing loans as they work their way through the loss mitigation/foreclosure process would only add insult to injury. As Walsh and MBA’s Deputy Chief Economist Joel Kan shared during the MBA Servicing Conference in Dallas, distressed servicing costs reached $2,005 per loan in the first half of 2024.
After being artificially deflated during the prior two years due to the rate environment and relief options offered during the pandemic, today’s servicing costs for non-performing loans (NPLs) now exceed 2019’s costs at $1,960 per loan.
Current economic constraints compel servicers to seek operational efficiencies. The top three contributors to NPL servicing costs are systems, customer service, and loss mitigation.
Given the stringent regulatory requirements surrounding distressed servicing, investments in servicing technology and borrower-facing staff are necessary to ensure compliance and, therefore, may be harder to trim or scale back from a cost perspective. However, by integrating eSign and remote online notarization (RON) into loss mitigation procedures, servicers can swiftly deliver electronically streamlined packages for signature while reducing their loss mitigation and, by extension, NPL servicing costs.
Maximizing efficiency becomes paramount in an environment where time translates to money, particularly amid rising interest rates and carrying costs.
Presently, an error-free loss mitigation transaction averages a turnaround time of 21 days. However, in practice, such transactions seldom occur without errors. With paper-based processes, rectifying errors entails reprinting and reshipping documents, followed by waiting on the borrower to locate a notary, sign and return the corrected paperwork.
In contrast, leveraging eSign and RON for loan modification transactions allows the borrower to review the documents ahead of the signing. Because the documents can be corrected quickly, the signing can still occur as scheduled, saving the servicer shipping costs and extra carry costs while retaining timelines.
Another benefit to borrowers is they can complete the modification documents from anywhere at any time, providing maximum flexibility, quicker closing times, a better overall experience, and tremendous value.
The significance of operational enhancements in reducing turnaround times cannot be overstated, especially given the stringent timelines servicers must adhere to in the loss mitigation process. In a scenario where every day and every dollar holds weight, compressing turnaround times from application to resolution yields immense benefits for both servicers and borrowers.
While lenders have long integrated eSign capabilities across origination stages, extending eSign and RON technologies to loss mitigation processes represents uncharted territory for many servicers. Fortunately, borrowers have readily embraced eSign technology, while Fannie Mae, Freddie Mac, and Ginnie Mae all permit servicers to employ eSign technology for loss mitigation transactions. As the CFPB and FHA underscore the imperative to support vulnerable borrowers, government-sponsored enterprises (GSEs) have facilitated mortgage servicers in providing swift and convenient access to loss mitigation solutions.
The arguments for embracing digital transformation echo those of similar transitions in various sectors: borrowers are accustomed to online transactions, eliminating the need for physical presence, error detection and correction are streamlined, and compliance is bolstered. However, in the face of escalating delinquencies and anticipated surges in loss mitigation transactions, the primary rationale for eSign and RON adoption mirrors that of the assembly line: enhancing process efficiency.
