PANDEMIC BECOMES THEIR BID TO IMPROVE AND EVOLVE
The mortgage originators are forced to tighten their financial standards from the credit point of view owing to the current situation. This is not an unusual state because lenders do have a general tendency of becoming risk-averse in any crisis situation. However, what appears atypical is the way originators have been dealing with the present COVID-19 pandemic.
Prompted by government policies, originators have been showing much empathy towards their clients. They have also adopted several corrective measures within a short while in order to assist borrowers who have been impacted by the present economic situation adversely. They have proactively implemented a number of essential measures such as:
- Extension of Payment Due Date
- Allowance of Deferred Payments
- Waiver of Late Payment Fees
- Assistance in avoiding Delinquencies
- Negation of Credit Rating
While the large mortgage players can afford to show the resilience and financial strength to help their consumers to an extent, the smaller ones also have been extremely preemptive in supporting their clients to avoid any near-term disruption in making mortgage payments. The last three months since the outbreak of the pandemic have been a huge learning for the entire Mortgage Industry. Instead of succumbing to it, the Mortgage Businesses have discovered new avenues of operations and risk assessment.
Let’s take a look at those avenues:
- Profitability and Capital Adequacy: Although home inquiries and new home buying have again gradually started taking a surge very recently but no one can deny that there is an overall setback. Nonetheless, the rate support and relief packages have kept the re-finance/ re-mortgage market moving. Traditionally, this entire segment has always operated on a spread too thin and now that no one can really predict the exact pandemic impact, there is definitely going to be a spike in defaults. Therefore, it’s given that the Liquidity Challenge is going to stay there for a while. Howbeit, the approach and applicability are surely going to be different for large capitalized bank lenders, local bank lenders and non-bank servicers.
- Credit Access: Many originators have reduced the LTV (Loan to Value) ratio in some of their key operational areas by taking certain measures. Lower LTV would result in higher requirements of margin for an applicant because even the well-priced segments will impact the overall demand. A reduced LTV for instance can lead to increased contribution from borrowers but eventually tightening the credit access.
Forbearance and moratorium are easing the pressure temporarily but if the uncertainty is prolonged, it will influence both the market and profiles of borrowers. For example, in the 4th month, Forbearance will trigger balloon payments; this means borrowers with the aforementioned plan will not be able to rip off the benefits of reduced interest according to conventional guidelines for minimum a year. This entire scenario might also give rise to new challenges of how one will define the credit norms.
With this unforeseen pandemic situation dominating human lives for quite some time now, the usual practices of many industries including Mortgage are getting scrutinized. Unless we understand the consequences of the changes we are embracing right now, we will not be able to sustain and thrive in the coming years even after the pandemic is gone. Hence, while looking for solutions and availing temporary support are definitely the way out, for now, understanding the long term impression is also as necessary.
In the upcoming part, we will discuss some more key areas that need much attention such as Credit Risk Profiling, Service Efficiencies, Digitalization, Delinquency and Risk Management. Stay with us!