The banking industry has historically seen moderate and deliberate changes to both processes and regulations. However, certain major economic events have ushered in quick and decisive action leading to sweeping changes throughout the industry. 2020 was a year of these changes coming faster than the industry had ever seen before.
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the uncertainty facing the United States and the world as COVID-19 was officially declared a worldwide pandemic. Evidence was clear that individuals, businesses, and Financial Institutions (FIs) would feel the financial impact for months, if not years, to come. At least in the eyes of the public, the primary focus of the CARES Act was stimulus payments. However, the Act also included mortgage relief to consumers that will likely have short- and long-term impacts on FIs.
The CARES Act allowed homeowners the opportunity to request total loan forbearance of up to 12 months, with extensions available up to 18 months, depending on loan type. The Act provided necessary assistance to millions who lost wages and jobs as the pandemic took hold. According to Freddie Mac, “Mortgage forbearance peaked in May 2020, with more than 4 million U.S. mortgages in forbearance, which represents about 8% of outstanding mortgages and $1 trillion in mortgage debt.” As we reach the first anniversary of the peak, what can we expect next?
It seems likely that delinquencies will remain low in the short term but, as millions of homeowners return to making regular mortgage payments, delinquencies will rise as 2021 continues. With the recent round of stimulus payments and tax refunds, the hope is that most homeowners will be able to ease back into a more normalized economic environment as the pandemic subsides.
With unemployment rates remaining higher than pre-pandemic rates, we expect to feel long-term effects later in 2021 and into 2022. The question is, how quickly will FIs see the impact and how significant will losses become? These trends will be interesting to monitor as we move forward.
2020 - The Shift to Remote Service
While the full financial impact on the mortgage sector remains unknown, one inevitable need for change became evident as 2020 unfolded. FIs have moved towards a more customer/member-friendly digital experience over the last decade. The expansion of online bill pay, mobile deposits, ITM’s, and other digital offerings have created an environment in which consumers have the option to bank almost entirely without human interaction. The mortgage industry, particularly in Community Banks and Credit Unions, still largely relies on the more traditional, in-person process. Customers sometimes forego applying for mortgages through their primary FI for the more seamless methods offered by larger FIs and online mortgage companies. Using proper technology, Community Banks and Credit Unions can create a digital end-to-end mortgage process allowing them to gain more traction in the mortgage sector and secure the total financial relationship of their customer/member base.
In addition to the enhanced customer/member experience, Mortgage Loan Originators (MLOs) and Mortgage Departments will significantly benefit from a more digital process. Many Ceto clients experienced origination volumes up to 150-200% of their original 2020 budgets. The drastic increase of applications and originations in the summer of 2020 put tremendous stress on these departments struggling to keep up with demand. Allowing customers/members to complete the entire process online (for those who seek it) will free up capacity and allow for higher origination volumes without putting undue stress on MLOs and processors.
If 2020 taught us anything, it is to expect the unexpected. The pandemic also taught us that FIs could and will adapt to change quickly, when necessary. As it pertains to technology, proactivity will help create efficiencies internally and deliver a more customer/member-friendly experience. As 2021 continues to unfold, only time will tell how the events over the past year will impact the industry in the long term.