The mortgage crisis of 2020 differs profoundly from the mortgage crisis of 2008. In the run up to 2008, lenders made suspect mortgages, and a substantial percentage of those mortgages were privately held. In 2020, lenders made seemingly solid mortgages, and those mortgages were largely backed by government-sponsored enterprises (GSEs).
Yet in both cases, financial institutions processed—or will process—a mind-boggling number of forbearance requests, undertake modifications or restructuring based on those requests, report the resulting activity (and adapt to shifts in reporting), and then attempt to mitigate losses.
And today as then, financial institutions expose themselves to risk at every step of the process.
That risk is substantial. After the 2008 crisis, the Wall Street Journal
reported that banks paid about $110 billion in fines.*
And that sum did not include the associated costs in legal, accounting and consulting fees—or the internal costs of litigation and compliance.
While the 2020 players have avoided many of the mistakes of their counterparts from 12 years ago, process risks remain. According to Matt Cooleen, partner, Risk Advisory Services, Grant Thornton, “For mortgage companies, it’s less of a credit crisis—although it is for Fannie Mae, Freddie Mac and Ginnie Mae—and it’s more of an operational risk crisis.”
But how do they manage the operational risks of large-scale forbearance, modification, restructuring, reporting, and mitigation?
Grant Thornton suggests a five-step process:
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- Assess the risk environment. First, do what is being asked of you—which starts with determining exactly what is being asked of you.
This means inventorying all relevant government, state regulator, and GSE directives and communications—looking for consumer themes and insights, reviewing industry data on customer complaints and reviewing any changes to your own investor programs.
- Assess the testing of regulatory changes and programs. Test your testing—scrutinize the implementation of all regulatory and mortgage changes you’ve made so far.
Pay special attention to ways in which you’ve changed your customer or regulator communications, captured additional data or altered your workflow. Note risks, errors and omissions.
“You need to set up an infrastructure and a process where you’re continually challenging your operations to make sure they’re doing things right,” said Cooleen.
- Evaluate customer feedback and complaints. Many of the actions taken in the last crisis grew out of customer complaints—and many actions were unexpected and unprepared for. Unexpected complaints suggest an unconventional approach to compliance.
By adapting the methodologies of consumer research—which typically live in the optimistic world of branding, marketing and new product introductions—you improve your chances of anticipating the kind of complaints that devastated lenders in the aftermath of 2008.
This includes all forms of voice of customer (VoC) research, a comprehensive ongoing approach for developing insights into your customers. Such research gathers input at every step of the marketing continuum, from the consumers’ initial awareness of your offerings through their consideration of those offerings, commitment and servicing through the maturity of the relationship. This approach actively listens for complaints and potential complaints, regardless of reasonableness.
This intelligence gathering entails reviewing contact center interactions through interactive voice response, agent disposition reporting, call center or chat recordings, and keyword indexes or speech to text transcriptions. The data you have can be enhanced by additional data you gather: focus groups and surveys that explore the perceived basis of complaints; identify the root causes of problems, and gauge the intent and intensity of customer issues.
This data can then be analyzed and visualized, yielding a useful synthesis.
- Define crystal ball customer impact scenarios. This approach to risk management is based on a simple insight: Every fine levied or punitive action taken is an ending to a story. If you can understand the stories, you can influence the ending.
So you use the insights gained by listening to the customer to craft scenarios or stories. It’s important to look at all the inferences from the data, including the surprising or outlandish ones. Cooleen said, “Come up with scenarios that maybe you have never conceptualized in the past.”
You then assign probabilities and impacts to each scenario. Once you know what might happen, how likely it is, and how bad it could be, you can draft a strategic roadmap.
- Construct a strategic roadmap. You do this by asking: Given the probability and impact of these outcomes, are there processes we should revise or technology we should implement?
The next step is often more or better communication. Your roadmap will help you decide how to communicate with your customers and, just as important, how to communicate with the relevant regulators. Communicate well and the story often ends well.
Of course, the process of responding to requests for forbearance, modification and restructuring will change over time. You’ll want to continue to monitor requests, outcomes, regulatory interpretations and changes to reporting.
The mortgage industry has already avoided many of the credit and lending mistakes of 2008. Now, it has a chance to avoid the process mistakes.
Partner, Risk Advisory Services
Mortgage Industry Practice Leader
+1 917 353 4711