As the mortgage industry struggles with profitability in the current rate environment, diversification can help, but the going could get tougher regardless at this point in the cycle, according to an industry outlook report by consultancy Berkeley Research Group.
Even business lines like servicing and nontraditional products that can offset decline in demand for traditional mortgages will have their challenges, the report noted.
Servicing can bring in revenue after a runup in rates like that seen in 2022, but since periods like this have historically tended to end in recessions that increase defaults and expenses, those who engage in it will still need to run a tight ship.
That said, with some exceptions, lenders with effective servicing operations might fare better in this environment than others.
“If you’re not retaining servicing, you don’t have a business hedge if the origination volume dries up,” said Michael Canale, managing director, at Berkeley Research Group.
There are things pure lenders can do to diversify when rates rise, like add nontraditional loan products, but those strategies have their challenges.
“Non-qualified mortgages, governed by strict regulations, may strain the liquidity of companies forced to buy out underperforming loans at a loss,” the BRG report noted.
Meanwhile, there is a mix of challenge and opportunity in servicing in that it generally hasn’t been fully modernized.
“One thing about servicing, it’s still a pretty manual process,” said Canale.
Technology has improved over the last 10 years or so but it’s not always used, and the current ascendancy of servicing in the wake of the first steep and prolonged runup in rates has brought more attention to it.
The challenge now may be to get servicing technology efficiencies in place before a cyclical turn intensifies cost pressures for this part of the business.
“We worked with a top servicer to automate their bankruptcy check posting process,” he said, citing one example. “They had a team of six people that were handling that process. We were able to drop it down to one and a half or two full-time roles.”
Technologies applied to the process of handling and checking the amounts on checks from distressed borrowers in bankruptcy, which get distributed by their trustees, included optical character recognition used for document data extraction.
The company also applied robotic process automation to the process involved in ensuring amounts on the checks, which get determined in the bankruptcy process, were accurate.
When asked about whether artificial intelligence has become a game changer in servicing, Canale said, “I don’t think we’ve seen the truly ‘going to revolutionize’ stuff that everyone is starting to get excited about.
But, “with all the news about ChatGPT and other tools that have been released, I do think that the artificial intelligence tools that are out there are starting to get pretty interesting,” he said.
“I don’t think we’ve seen the truly ‘going to revolutionize’ stuff that everyone is starting to get excited about yet,” he added.
