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As we close out 2023, and turn to 2024, we reflect on the challenging operating environment for many mortgage originators, especially the small and mid-size Independent Mortgage Banks (IMBs) and optimistically look forward to more robust years. The following year end update will highlight the state of the economy, cover current events, liquidity concerns, and the changing regulatory landscape. For more information on the mortgage industry and the services performed, visit the Mortgage Center of Excellence. State of the economy  Throughout 2023, the Federal Reserve raised the Fed Funds rate four times for a total of 100 basis points (bps) from 4.50% to 5.50%. Simultaneously, a historically low number of homes for sale continued to place upward pressure on housing prices and limit borrowers’ ability to afford new houses. The increased financial requirements largely blocked out first time homebuyers. Existing homeowners were presented with a dilemma on whether to sell their existing homes with mortgages at potentially much lower rates, for new houses with mortgage rates at two-decade highs. The trifecta of higher interest rates, low inventory, and higher housing prices, slowed mortgage originations significantly when compared to the prior year from approximately $2.3 trillion to $1.6 trillion, impacting the bottom line of many IMBs.  During the annual Mortgage Bankers Association (MBA) conference in Oct. 2023 and a subsequent article from the MBA, the MBA projected a decrease in gross domestic product (GDP) and consumer prices, with an increase in unemployment rate. While there have been various outlooks on the future economy with many economists forecasting a “soft landing,” the MBA, along with other trade groups and economists, have predicted recessionary conditions. These recessionary conditions are predicted to move the Federal Reserve Open Market Committee to cut the Federal Funds Rate starting in 2024, and continuing through 2025, in line with economic indicators. In addition to the anticipated recessionary conditions, other factors, such as the cost of debt on the federal budget and the potential impact of commercial real-estate loans maturing and requiring subsequent refinancing at higher rates, could impact the decision to cut rates.  With potential rate cuts, many are projecting a considerably larger origination market starting in 2024 through 2026, which was noted by the MBA in their Oct 2023 article. For the week ending Dec. 21, 2023, the weekly average Freddie Mac 30-Year fixed rate mortgage fell to 6.67% from a high of 7.79% for the week ending Oct. 26, 2023. Similarly, the 10-year Treasury rate which mortgage rates generally track, fell below 4% from a high of approximately 5% during a comparable period. The decrease in rates is expected to spur home sales and bring potential homeowners who were sidelined back into the purchase market. Also, refinances are expected to increase for those who purchased and financed homes at higher rates.  Current events  With the completion of the second half of 2023, there were several headlines that could impact the mortgage origination space. Comerica and Fifth Third Bank decided to leave the warehouse lending market. The impacts of Basel III Endgame could further impact who decides to stay in the warehouse lending space. The enactment of Basel III, which is covered in greater detail later in the article, has a direct impact on mortgage lenders. These events could impact sources of cash and financing rates.   During the second half of 2023, the National Association of Realtors was ordered to pay damages for excess selling fees. While this is a recent event and the litigation is still in process, there are different views on the impact of this event. One view is that by not requiring the seller’s agent to compensate the buyer’s agent, this could force buyers into having to compensate their agent, increasing the financial requirements for home ownership. Another view suggests that sellers might include the broker's commission in their home's overall cost, thereby inflating the home's sales price. Consequently, with reduced commission to pay, they may refrain from raising the sales price as much.  A third view is that the ruling could lead to fixed rate pricing ( agents charge a flat fee for their assistance), which could benefit both the seller and buyer. While this litigation is evolving and could bring significant changes, it is just another source of uncertainty for a challenged segment.  In early 2023,  we noted that organizations should prepare for the possibility of increased mortgage defaults. During the second quarter of 2023 through year end 2023, the industry discussed the increase in delinquencies, which will continue to pose a risk in 2024. While delinquencies were at comparably low levels, they have started to increase.  From a positive perspective, with the Federal Reserve holding rates flat and the expectation of lower rates in 2024, there is an expectation for increased mortgage demand.  Need for liquidity  As some mortgage banks weathered the storm and utilized cash reserves during the recent period of interest rate hikes to offset the slower origination market, the need for sources of liquidity is still a priority until there is a stabilization of the origination market. Companies should forecast their cash needs for the foreseeable future and identify the sources of cash to meet these needs.   For those companies that hold servicing, they should weigh the benefits from a sale of mortgage servicing rights (MSR), versus the longer-term lead source for future originations and the natural hedge against periods of origination activity downturns. Companies that hold servicing have a consistent relationship with these borrowers that lead to future refinance and purchase opportunities. However, MSR values are generally higher than they were in the past several years due to low mortgage refinancing demand and companies could benefit from a timely asset sale at these higher valuations. Another servicing strategy is for companies to evaluate the benefits of selling loans servicing released versus servicing retained for the additional servicing release premium on sale. Further, companies can enter into an excess servicing sale as well, where the excess servicing above the base servicing is sold, while the base servicing is retained. 
Entities that meet the minimum net worth and regulatory consent requirements can enter an MSR financing arrangement. They can also consider entering a servicing advance arrangement to generate additional liquidity from financing versus selling the servicing. If delinquencies increase, having financing in place for advance obligations, primarily Government National Mortgage Association (GNMA) principal and interest (P&I) advances, becomes a more tactical need. For more detail on the requirements of P&I advancing, see our article which discusses what happens in the servicing process when a loan becomes delinquent.   IMBs should consider carrying more than one warehousing financing facility, to mitigate the risk that a line gets suspended or there is certain product that cannot be financed on one line but can be financed on the other line. Companies should also evaluate if they can repurchase loans on these lines, because agency repurchase requests could become cash intensive during an environment where liquidity is tight. Finally, in an environment with increased delinquencies, companies should prepare for an environment conducive of loan modifications in accordance with loss mitigation guidelines.  While mortgage rates tend to track changes in the 10-Yr Treasury rate, financing facilities tend to be pegged to the Secured Overnight Financing Rate (SOFR) which track to changes in the Federal Funds rate.  This could lead to a situation where there is a disconnect or expectation difference between mortgage rates and financing rates, impacting net interest margin. IMBs should try to manage  this disconnection, optimizing financing strategies for better alignment with market dynamics and margin management. For organizations that are concerned about passing their financial covenants, they should prepare a financial forecast and a financial plan and connect with their financing partners to see if a covenant waiver will be required.  Diversification  With margin down significantly off the 2020 highs and a significantly smaller origination market, many companies are turning to other products to generate revenue. While there are niche lenders that focus on these products, some lenders have re-entered the non-QM (nonqualified mortgage) space to originate loans to these qualifying borrowers. Some specialty finance companies are focused on buying and securitizing non-QM product and securitizing these.   To account for the higher housing costs in today’s market, and for some borrowers who are priced out, some lenders started offering 40-Yr mortgages in addition to the 30-Yr mortgages to amortize the principal over a longer period. When interest rates were at historical lows following the COVID-19 pandemic, the amount of adjustable-rate mortgages were minimal.  However, at these higher rates, there has been an influx of ARMs which reset as the borrowing base index (index the ARM is pegged to) resets, with the expectations that interest rates will eventually decrease.   With the rise in housing prices, many homeowners have a lot of equity in their homes. With increases in credit card balances, delinquencies, and with the need to pay off higher interest rate debt, many lenders are offering HELOCs and cash out refinances to provide borrowers with this needed liquidity. As we complete the holiday spending season, there could be an uptick in borrowers requiring the cash to meet buy now, pay later, or credit card balances. Some lenders are offering renovation loans for borrowers who are looking to make renovations versus buying new houses or utilizing other methods of higher rate financing for home improvements.  While traditionally considered a higher risk loan, many lenders now offer manufactured housing loans for purchasers of manufactured housing. Some lenders are also offering buydown loans to lower the interest rate on the loan. They are buying down the initial rate to make the payments more affordable. The buydowns can be permanent or temporary for a period such as one or two years and in some cases longer.  In the current origination market, it seems plausible that these products and others will continue to be offered to meet borrowers’ needs and attract new borrowers.  Regulatory 
Cybersecurity center stage  In addition to managing operating performance and meeting the new regulatory requirements, there has been an increase in the amount of cybersecurity threats. Given the vast amount of borrower data, wire activities through the origination process and payment activities through the servicing process, the mortgage industry is highly susceptible to cyber incidents. Notable cyber breaches that have impacted the industry, with costly consequences in terms of loss mitigation and resolution expenses, and reputational issues impacting consumer trust.  To effectively mitigate the risks stemming from cyber incidents, companies require buy-in from all employees of the organization and the board and not just from the CTO or CISO. With the appropriate buy-in, mortgage and servicing entities should:  Set the required governance structure to enforce the appropriate oversight of the mortgage ecosystem exposed to cyber.  Establish policies and procedures to mitigate cybersecurity risks and escalate incidents.  Develop a robust risk assessment to ensure that there are no gaps in the policies and procedures and ensure that the appropriate controls and precautions are in place.  Implement the appropriate technology to support the mitigation activities, including firewalls, scanning technology, multi-factor authentication, penetration testing, among others.  Develop the appropriate reporting to monitor the mortgage ecosystem and to timely escalate and respond to incidents.  Continue to train and educate employees on the risks of cyber to reduce future incidents.  Evaluate the need to obtain cybersecurity insurance to protect the organization against incidents.  With the adoption of innovative technologies and the significant flow of funds tied to the mortgage space, there is minimal expectations for a decrease in inappropriate cyber activity, and companies should be prepared to mitigate the risks from bad actors.  Looking forward  With the MBA forecasting more origination volume in years 2024 through 2026 per the MBA Dec 2023 forecast, and with decreases in mortgage rates and increases in applications, there is some new optimism that has not been prevalent in more than a year. However, we believe that it is critical to manage expectations until baseline production metrics are met and continue to stay focused on the following over the next several months:  Deriving a realistic budget in terms of volume and margins for the next year.  Knowing what is required to breakeven and be profitable at different levels and mix of production.  Forecasting the cash needs and identifying the sources of cash.  Having a plan to sell servicing or hold and finance servicing and be prepared to recapture loans.  Focusing on good margin product and continuing expense management.  Understanding and measuring the implications of the new regulatory requirements.  This article aims to help you better understand year-end events and regulatory requirements that are impacting the mortgage and servicing industry.  Companies and interested parties should monitor these developments and contact their accountants, consultants, and industry specialists prior to taking instruction from this article.  Baker Tilly professionals are available to discuss your questions and individual needs through our Mortgage Center of Excellence. 
Co-author Matt Petrick, CPA is a senior finance and accounting executive specializing in the financial services industry, with a focus on mortgage and servicing entities. Matt has experience with REITs, financial institutions, business development companies and other funds. The discussions throughout the article should not be implied to represent the position, processes, or procedures of professional affiliations, current or former employers, or employer relationships.  The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.

Financial Services

Banking & Capital Markets 

Credit Unions

Community Banks

Consumer Lending

Regulatory Compliance: Alphabet Soup

Compliance+

2023 Year end updates for the mortgage industry

Mortgage servicers have been in reaction mode since the onset of the pandemic more than three years ago. The general consensus is that servicers performed very admirably when reacting to pandemic policies by implementing procedures quickly to avoid servicing challenges for borrowers. The success of the industry’s response, however, is clouded by inconsistency in how servicers are performing. In addition, the current inflationary situation and economic indicators are pointing to the possibility that this difficult environment will persist into 2024. Previously, regulatory agencies have lacked the resources to effectively monitor the behaviors of servicers. However, as Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra suggested at the Mortgage Bankers Association’s National Secondary Conference in May 2022, servicing has been the focus for agencies.   The prospect of a regulatory audit for a servicing operation can be daunting. However, with a detailed action plan and sufficient planning to shore up identified areas of concern it can be managed effectively—especially if the performance gaps fall within the key observations of CFPB reports. Results of these CFPB servicing audits can be found in the CFPB’s Supervisory Highlights publication at Supervisory Highlights | Consumer Financial Protection Bureau (consumerfinance.gov). Conducting thorough policy review  The first order of business is to conduct a thorough review of the policies and procedures that define requirements for how the servicing operation runs in accordance with all applicable regulatory, agency, and Government Sponsored Enterprise (GSE) guidelines. Next, a gap analysis must be performed evaluating what is codified in the document against expected applicable practices. In addition, an effective change management process provides an auditable trail of updates that demonstrates a proactive approach to servicing policy management. The dissemination of policy and procedural changes—coupled with the relevant associate training—within the servicing organization further bolsters the foundation of effective and compliant operations. Having current and detailed policies and procedures is a great base, but periodic QC (Quality Control) testing is critical to understanding how the servicing operation performs to those expectations. QC testing results can signal the need for course corrections or provide confidence during regulatory findings. The good news is that the CFPB is being transparent in signaling what their specific focus will be in terms of the mortgage industry. The Mortgage Servicing COVID-19 Pandemic Response report, issued in May 2022, noted some key observations: Call center metrics – With a focus on hold times and abandonment rates, borrowers may not be able to secure the needed assistance to guide them through their mitigation options.  Delinquency and forbearance – Too many borrowers exited their forbearance plans in a delinquent status with no loss mitigation measures in place.  Data challenges – A lack of reporting data on key metrics raises questions about a servicer’s tracking and reporting capabilities, including but not limited to:  Interactive Voice Response (IVR) navigation – A lack of data on time spent before reaching a live agent  Demographics – Inconsistent tracking and maintenance of data on each borrower’s race, ethnicity, and language preference  Language options – Potential disparate treatment and outcomes for limited English proficiency (LEP) borrowers versus non-LEP borrowers   Area of focus: The borrower experience  Using these key observations, a servicing operation should focus on the borrower experience and the metrics by which the CFPB will judge them: (1) the number of call center inquiries; (2) the average hold time for the borrower or average speed to answer; (3) abandonment rates; and (4) how long it takes to address the borrower’s reason for calling.   Because of the availability of data on the average answering speed, the CFPB was able to make a distinction between borrowers navigating the IVR system and the queue time to speak with a live person or just tracking (due to lack of data) queue time to speak with a live person after exiting the IVR system.  A lack of awareness about IVR time could “indicate a potential weakness in a servicer’s monitoring and compliance with requirements.”  Area of focus: loss mitigation strategies  Since the pandemic started the industry reacted quickly when it needed to, providing CARES Act assistance to over 5 million borrowers and moving them into mortgage forbearance programs that allowed them to remain in their homes throughout the pandemic. The anticipated spike in loss mitigation activity has not manifested in a meaningful way yet but reviewing loss mitigation processes will help servicers prepare if foreclosures increase. The activity should comply with all applicable loss mitigation requirements, including providing timely information about modification options and the timing and processing speed for the evaluation of modification applications while suspending foreclosure processes during the review and approval period.   Another important regulatory consideration is a servicer’s Fair Debt Collection Practices Act (FDCPA) compliance. The nuance of FDCPA compliance is still being refined through CFPB clarifications and court cases, but, in general, servicers should engage with borrowers without hint of behavior that results in the borrower feeling underserved or harassed. Additionally, in managing loss mitigation activities, servicers should have a sound Servicemembers Civil Relief Act (SCRA) compliance workflow to ensure that eligible service members and their families are afforded the protections defined in SCRA.  While not required by regulation, having a Homeowner Assistance Fund (HAF) policy in place is an effective loss mitigation tool to assist borrowers that have had a hardship associated with the pandemic and that meet the income limit requirements in the state in which the subject property is located. It also can be viewed as “useful extra credit” in the context of a broad regulatory audit.   In the event a borrower exhausts the available loss mitigation options—modification, short sale and deed-in-lieu—and the servicer is forced to foreclose, the servicer must have an effective policy and plan in place to address foreclosure-related activities. The servicer must know the occupancy status of the property and if there are appropriate protections in place for tenants if the property is a rental. Is the servicer managing the property disposition process or do they have effective oversight of their vendor to perform the required maintenance activities?  Area of focus: fair servicing analysis  Equity and non-discrimination are key themes of Chopra’s CFPB, and servicers should keep them in mind for all policy implementations. In terms of servicing practices, keeping a sharp eye on the results of servicing activities and outcomes across different social demographics, income strata and geographic variances will help servicers identify potentially disparate treatment issues within their portfolio.    Language preference deadline  The CFPB has noted that the failure of a servicer to provide access to information in a clear and transparent manner and in particular the lack of support for limited English proficiency borrowers could be viewed as being violations of the Equal Credit Opportunity Act (ECOA) and other federal consumer financial laws. The Federal Housing Finance Agency’s (FHFA) mandatory implementation for lenders to collect a borrower’s language preference to sell loans to Fannie Mae or Freddie Mac became effective in March 2023. It should be apparent to servicers that proactively managing future expectations would be well met in a regulatory audit. Before the pandemic, servicing organizations had already been engaged with the development and deployment of alternative techniques to communicate with borrowers based on their preferences. This included determining preferred contact methods, customizing communications and leveraging the media to enhance reach, utilizing informational portals and self-help tools to educate borrowers independently, providing resources in multiple languages for LEP borrowers, and so on. The intensity of the pandemic and CARES Act response accelerated their use.  The CFPB has noted the following deficiencies in its recent publications:
The general success of the industry’s response, however, is clouded by inconsistency in how servicers are performing. Economic indicators and the current inflationary environment are pointing to the potential for continued choppy waters for mortgage servicers into 2024. Advance planning, proactively assessing operational efficacy, and adhering to established policies and procedures will provide a great defense for a servicer in the face of a regulatory audit.

Now that the pandemic is behind us, regulatory audits are in the not-to-distant future for mortgage servicing organizations. Baker Tilly can help your business prepare. Read through our plan and contact our team for more information.

Real Estate Investors

Mortgage servicing – planning ahead for your next regulatory review

The client challenges  The client was looking to be approved by Fannie Mae in order to grow their business. Unaware of the complexities of the process, the client was unprepared to navigate the approval process and prepare documents for audit. They needed help, and quickly, to gather all the required pieces and have the documents appropriately organized for review.  Baker Tilly’s solution  Baker Tilly provided personalized assistance to help the client understand and maneuver the nuanced process of getting through the Fannie Mae direct seller approval process.  Our professionals assisted the client through the process by helping the client get the right documentation, answer process questions and find solutions for difficult processes. Our knowledge of the Fannie Mae approval process to help the client prepare for their review. This included compiling sample files as well as preparing data and documents to read appropriately during the review.   Results achieved   With Baker Tilly’s assistance the client was able to complete the process and achieve Fannie Mae approval. This approval allows them to do business within the largest loan marketplace. After being approved by Fannie Mae a mortgage lender can now sell directly to Fannie Mae opposed to an aggregator, allowing them more options in execution strategies for loan disposition. This approval opens the client up to the future of servicing their own loans and expanding lending operations.

Read the case study to see how Baker Tilly's advisors helped a small mortgage company achieve Fannie Mae approval.

Mortgage company achieves Fannie Mae approval with help from Baker Tilly advisors 

Check back for an informative article that reviews all the "what if” scenarios, including interactions with the CFPB, a recession, different risk profiles of your portfolio, and more 
VIDEO

This informative article reviews what your organization's mortgage portfolio should review for its servicing policies, procedures and practices in preparation for the CFPB.

Prepare your mortgage portfolio for the “What ifs”

Not every borrower makes timely payments, payments in full or even payments at all. In these cases, servicing entities are typically required to “advance” the P&I, known as principal and interest advances, and T&I, known as escrow advances. Entities may also incur recoverable corporate advances, which are expenses the servicer paid that are recoverable from the borrower, such as bankruptcy fees, forced placed insurance and other expenses.   Further, entities may incur nonrecoverable corporate advances, or the fees that the servicer determined in its good faith business assessment will not be recovered. Many of these corporate advances (also known as foreclosure advances) are tied to the preservation and, if necessary, the liquidation of the mortgaged properties.   Complexities in servicing advances  Advances are recovered from borrowers when payments are ultimately made by the borrowers, liquidation of the property or by filing claims with the various agencies or companies that insure the loans. During the collection process, servicers incur costs associated with trying to collect the payments, the foreclosure process and ultimate sale of property in liquidation scenarios. The expenses incurred (advanced) by the servicer are due back to the servicer, which may be repaid by the borrower, investor or through liquidation.  Servicers should have controls around the appropriateness and collectability of advances and compliance with regulatory, investor and insurer guidelines. In addition to the investor and insurer guidelines, many states and counties have guidelines around what can be assessed to the borrower and minimal entitlements that the borrowers are allowed. For example, many state "and counties" have criteria “supporting what” lien release fees can be charged to the borrowers and “every state” has guidelines around foreclosure, while "some" states require minimum interest that is due on borrower escrow funds. Costs associated with bankruptcy liquidation are also complex since it’s guided by complex jurisdictional guidelines.  Forbearance and rising interest rates   With the onset of COVID-19, many governmental bodies adopted the Coronavirus Aid, Relief and Economic Stability (CARES) Act and various other programs to provide temporary relief — primarily through forbearance — to defer the need to liquidate property and to keep borrowers in their homes. Under the CARES Act, lenders and servicers were prohibited from starting a judicial or nonjudicial foreclosure judgment until March 31, 2021, which was later extended to July 31, 2021. Borrowers could request a mortgage forbearance up to 180 days and request a secondary extension of 180 days so long as the borrower experienced a financial hardship due to COVID-19. This was later extended to permit a total forbearance period of 18 months.  With the completion of the CARES Act — combined with the recent increase in interest rates — the industry could see a jump in delinquencies. Moreover, a certain percentage of borrowers never successfully completed the CARES forbearance programs. With an upturn in delinquencies and residual CARES Act forbearances, servicing advances have been identified as a heightened risk for operators holding these advances. To complicate matters, due to rising interest rates, refinancing and modification programs have been constrained affecting the ability to recover principal and interest advances and creating potential constraints. This has caused many organizations to focus on the advance recovery processes to limit operational losses and minimize liquidity impacts of advancing obligations.  Due to the complexities and manual nature of servicing, it is often challenging to identify the areas influencing ultimate collectability, creating the potential for additional losses. These hidden losses and the long time frame until collection makes the implementation and management of reserve methodologies even more challenging. Those charged with financial governance also need to evaluate whether losses on advances are related to credit issues or operational losses and the related accounting associated with this. 
This article is part of a series of servicing articles that Baker Tilly will be releasing in the coming months. Stay tuned for the next installment discussing what happens in the servicing process when a loan becomes delinquent.   Baker Tilly’s Mortgage Center of Excellence offers assistance with servicing, regulatory compliance, quality control and risk management — all in one place. Our mortgage specialists can help servicers traverse the ever-changing mortgage landscape. Discuss the state of the industry with our team and how we can help you prepare for the future, today. 
Co-author Matt Petrick, CPA is a senior finance and accounting executive specializing in the financial services industry, with a focus on mortgage and servicing entities. Matt has experience with REITs, financial institutions, business development companies and other funds. The discussions throughout the article should not be implied to represent the position, processes, or procedures of professional affiliations, current or former employers, or employer relationships.  The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. 

This informative article discussed the complexities in servicing advances, issues impacting hidden losses on servicing advances and issues impacting the recovery of servicing advances when dealing with increased mortgage defaults.

Preparing your organization for increased mortgage defaults

Many of the attendees at the recent 2022 Mortgage Bankers Association’s (MBA) annual convention left the three-day convention – featuring a speech from former Speaker of the U.S. House of Representatives Paul Ryan and a performance by Darius Rucker – with mixed feelings. Despite the somber reality of the current state of the mortgage market, there was a palpable underlying optimism for what the future holds. Though many believe we are not yet clear of the difficult climate we are in, calmer days are coming and collectively the industry is heading towards a sense of normalcy once again.  In his economic outlook session on the first day of the convention, MBA’s chief economist Mike Frantantoni made predictions that were not surprising and generally in line with the consensus sentiment from the attendees. The forecast for next year indicates a recession (albeit an expected mild one) and that mortgage origination volumes should decline year-over-year from the anticipated $2.25 trillion in 2022 down to just below $2.0 trillion in 2023. Initial estimates for 2024 show a bit of a rebound back to $2.3 trillion. 
 
The key to how hard of a landing will be seen in some key economic data to be released before the end of the year. The 7.7% consumer price index (CPI) figure released by the U.S. Bureau of Labor Statistics (BLS) on Nov. 10 seemed to indicate that some of the Fed’s aggressive actions over the last several months were starting to show signs of getting things back on the right track. Frantantoni pointed out that in the current economic state, it is more important to read between the lines of some of the statements coming from the Federal Reserve Board of Governors. Some recent statements from them indicate that we’ve done enough and that there may be some concerns about overshooting.     Job market and interest rates  Regarding the job market – the byproduct of slowing job growth and Fed interest rate activity should lead to a rise in unemployment numbers in 2023-24. The mortgage industry has been one of the hardest hit sectors in 2022, and with estimates of 15-25% overcapacity currently based on volumes, there will likely be more layoffs as firms react and adjust. Other sectors are making moves similar to this, and it is anticipated that by the end of 2023, unemployment will be around 5.2% and drop in 2024 to 4.4%.   Interest rate volatility is higher today than it was in 2020, but not as high as it was in the 2008-09 period. The outlook for interest rates is that we’re currently in a spike and that as inflationary pressures cool, rates will cool as well – which could lead to some refinance opportunities in mid-2023 as rates settle around 5.5%. In addition, home equity positions are strong due to rapid price appreciation over the last several years. While the Homeowners Protection Act (HPA) has been cooling – in some markets more rapidly than others – even the expected pull back in 2023 won’t unduly pressure homeowners’ ability to tap home equity in the event of a need.    Inflation trends  While Harry Truman was famous for asking for a one-handed economist, Bill Adams from Comerica gave a presentation at the Texas MBA Mortgage Symposium – and he readily acknowledged that he’s a two-handed macro economist. On one hand, he pointed to the Purchasing Managers Index (PMI) and talked about how in early 2020, the PMI was giving early warning signs that inflationary pressures were already starting to gurgle – long before it was on the radar screen of the BLS. Recent data suggests that we are already on the road to a recovery and that the spending trends have been shifting this year as well – post-pandemic activities are seeing a noticeable shift to spending on entertainment, travel and dining out. On the other hand, he pointed to data that showed that costs for some “sticky services” such as veterinary care, motor vehicle repairs and daycare were still accelerating.    Volatility and profitability  For mortgage originators, the overarching concern is volatility and profitability. Typically, mortgage bankers fare well in the second and third quarters in terms of profitability as those are generally seen as higher origination periods and fixed operational costs are spread out over a larger number of new loans. Since 2008, there have only been four quarterly periods where overall mortgage banking profitability (based on a survey of independent mortgage bankers) has been negative and 2022 marks the first time a negative quarterly profit number showed up in the second quarter. While Q3 numbers are not out (as of this writing), it is also anticipated to be a challenging quarter and may be the first time ever to see two consecutive quarters of negative profit for mortgage banks.   At the convention, MBA’s Marina Walsh discussed such technology concerns as cutting IT costs, managing information security costs, picking the right team, integration efforts and adoption among the user base. Back in 2020, Rick Hill of the MBA estimated that volume decreases would lead to the increased, rapid implementation of enabling technologies as overutilized resources would have the time and the ability to focus on them. The gradual decrease in volumes didn’t materialize and in general, firms were not able to re-prioritize internal resources and important projects were delayed.   While there are several arguments concerning whether a slow deflation of rates would have been better than what we experienced earlier this year with the largest increase in interest rates in 40 years, in reality the lenders had to make quick-fire decisions with the same alacrity as they had to at the onset of the pandemic when we moved to all-remote.   Shift away from reaction mode  From our perspective, now that there is a light at the end of the tunnel in terms of the aforementioned “calmer waters,” we are seeing firms that have been in reaction mode over the course of 2022 start to focus on the elements within their origination shops that they had put on the back burner.   What is generally true is that these organizations now have to do more with less. Operational staffing has been and will continue to be reduced, and systemic issues that weren’t adequately addressed during the last two years of capacity stressing volumes are now coming to the forefront. The lack of internal resources to tackle those issues can prove to be problematic.   This is a great time for strategic conversations with your vendors as you prepare to close the books for 2022 and prepare for 2023. If you are not aware of your vendor’s full suite of offerings, you should be. Oftentimes, a decision to onboard a vendor was single-threaded through one particular service – and having a candid conversation about the goals and objectives for your organization in the coming year could provide multiple benefits.   A vendor in your existing stable may be able to find solutions for issues you weren’t aware they had the means to solve. Vendors are traders of anecdotal best practices and can act as neutral observers,  provide unemotional input for certain business challenges and put the proper perspective on business ideas.    Our time at the MBA Annual Convention was fruitful in many regards. We had conversations with clients and prospects looking forward to the future while being very cognizant of the ongoing struggles we’re collectively facing. We spoke with fellow vendors and shared ideas about what firms are talking about and how we can provide solutions or resources to help. What was almost universally true during our time in Nashville is that while not many people set out with intent on being in the mortgage business, once we get in it, we are dedicated to it and to each other.

This informative article discusses key takeaways from the MBA annual convention which reviewed the job market, interest rates, inflation and much more 

Banking & Capital Markets

Reflections on the MBA annual convention

CARLSBAD, Calif. (Nov. 9, 2021) – Leading advisory CPA firm Baker Tilly US, LLP (Baker Tilly) announces its intent to acquire California-based The Compliance Group (TCG), a one-stop-shop for mortgage lenders requiring regulatory compliance and seeking risk management. The combination will be effective Dec. 6, 2021. Financial institutions and independent mortgage bankers continue to shift their focus toward the modern borrower experience, defined by digitization and automation. At the same time, quality control services must keep pace with high demand and evolving compliance requirements. 
TCG’s deep understanding of managing the regulatory and risk obligations for the mortgage industry plus Baker Tilly’s extensive financial services specialized knowledge and solutions — internal audit, cybersecurity, digital transformation, regulatory compliance and financial modeling — creates a combination of skills, knowledge and bench strength to produce powerful outcomes for the financial services industry. TCG’s 110-person remotely located team will join Baker Tilly.
About Baker Tilly US, LLP (bakertilly.com) Baker Tilly US, LLP (Baker Tilly) is a leading advisory CPA firm, providing clients with a genuine coast-to-coast and global advantage in major regions of the U.S. and in many of the world’s leading financial centers – New York, London, San Francisco, Los Angeles and Chicago. Baker Tilly is an independent member of Baker Tilly International, a worldwide network of independent accounting and business advisory firms in 148 territories, with 36,000 professionals and a combined worldwide revenue of $4.0 billion. Visit bakertilly.com or join the conversation on LinkedIn, Facebook and Twitter.  About The Compliance Group (TheComplianceGroup.net) The Compliance Group (TCG) is a service-oriented company supported by unrivaled expertise. The TCG mission, since inception, is to provide quality service to clients while offering cutting edge solutions that resolve the complexities of today’s compliance and credit risk. TCG is passionate about assisting all types of financial institutions within the mortgage industry. Applying decades of state and federal regulatory compliance and risk management experience, niche expertise, and common sense, TCG assists clients in easily navigating evolving regulatory channels by mitigating risk through their Enterprise Risk Management platform.

Leading advisory CPA firm Baker Tilly US, LLP (Baker Tilly) announces its intent to acquire California-based The Compliance Group (TCG), a one-stop-shop for mortgage lenders requiring regulatory compliance and seeking risk management. The combination will be effective Dec. 6, 2021.

Baker Tilly Creates Mortgage Center of Excellence with Acquisition of The Compliance Group

The key to a successful mortgage enterprise is to establish a proficient compliance and quality control foundation. With Baker Tilly as your compliance advisor, we can provide mortgage compliance support that is multifaceted and can be customized depending on your needs. We frequently assist our clients in many areas, including but not limited to:

Compliance reviews with an emphasis on various regulations including, TRID, RESPA, TILA, ECOA, HMDA, privacy, etc.

Build a compliance and quality control foundation

Baker Tilly’s outsourced mortgage compliance services are designed for companies seeking ongoing support in meeting their internal and external compliance demands. Based on each client’s unique needs, we operate as an extension of your organization by executing the agreed-upon compliance program and providing monthly support, updates and feedback to your organization.

We also provide you with access to our staff of qualified compliance specialists to address various compliance questions.

These services are also offered a la carte, allowing you to build the outsourced compliance program that fits your needs and budget. Baker Tilly can support all compliance components related to the financial services industry, depending on the client’s needs and staffing.

Being prepared for regulatory audits is critical to a successful audit outcome. Baker Tilly can help. We base part of our core internal mortgage compliance audit program on audit recommendations provided by Fannie Mae — by far one of the most comprehensive in the industry, while modifying the audit to meet the distinctive requirements of the regulatory agency performing your forthcoming audit. Baker Tilly’s mortgage compliance team also reviews all departments within your origination and servicing operations to determine if any compliance deficiencies exist.

Our staff have experience in the vast array of regulations covered by regulatory agencies and can provide recommendations for changes to processes, as well as policies and procedures for adherence with these regulations.

Connect with our Value Architects™  to find out how we can tailor a compliance program to meet your needs.

The key to a successful mortgage enterprise is to establish a proficient compliance and quality control foundation.

With the banking industry (and world) in a state of digital transformation and change, you need a team that can assist in navigating challenges and charting a new course. 

Baker Tilly banking practice leaders collaborate with a wide range of financial services companies on financial statement, internal audit and advisory services.

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Baker Tilly’s mission through our Mortgage Center of Excellence is to provide quality care to our clients while also staying on the cutting edge of the complexities of compliance and credit risk. 

Mortgage Center of Excellence | Mortgage Compliance & Quality Control Solutions

Michelle Doyle is a principal with Baker Tilly US, LLP.

Jim McCracken is a director of business development with Baker Tilly US, LLP.

Kevin has been serving financial institutions since 2000 with significant emphasis on banking operations.

Janet Twombly is a compliance director with Baker Tilly’s financial services practice.

Baker Tilly's extensive experience in mortgage loan servicing allows us to specialize in both general servicing and default servicing activity.

Baker Tilly’s mortgage compliance team conducts a review of your policies, procedures, controls, and practices in place to validate compliance with the MERS Membership Agreement requirements, including data standards.

Our processes are designed to assist clients in an ever changing mortgage origination environment by providing an industry leading quality control platform.

Managing risk associated with mortgage lending, servicing, and financial services requires attention each day, every day, with a strategy to bring together diverse compliance management categories into one compliance platform.

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Build a compliance and quality control foundation

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