DS News - U.S. Bank

» VISIT US ONLINE @ DSNEWS.COM 63 O'Reilly, who served as Director, Automated Underwriting Product and Risk Management Solutions at Fannie Mae from 2002–2007, said that the culture at the GSEs had changed significantly since that time, especially when it comes to their approach to innovation. "e GSEs during that period were criticized—and to some degree, rightly so—for what has been characterized as a 'take-it-or-leave it' approach to innovation," O'Reilly said. "ey would deliver a solution to the marketplace, but there was very little collaboration with the industry during the process of the development of that innovation." O'Reilly says that the GSEs' mindset has shifted significantly in recent years. "Both Fannie and Freddie are engaged in a strongly collaborative environment, and you're seeing the benefits of that. When we talk to our clients—both large banks and nonbanks—they tell us it's night and day in terms of the level of collaboration and this notion of test and learn and fail quickly. Fannie and Freddie are working to undertake large initiatives in bite-size chunks," he said. at, O'Reilly said, is a lesson every servicer can take to heart and put into action. "As the rules of the road have become more well defined, we can start investing more in upgrades to the customer experience," Rawls said. "e mortgage process can be complicated and intimidating, and now is the time to think of new ways to approach customer pain points and give them better tools, technology, and products for a more seamless, simpler experience." GETTING YOUR BEARINGS FOR 2019 A session conducted during the National Association of Realtors' 2018 Realtors Conference & Expo suggested that the five most critical issues facing the industry in 2019 included: 1) interest rates and the economy, 2) politics and political uncertainty, 3) housing affordability, 4) generational change/ demographics, and 5) e-commerce and logistics. "Mortgage is cyclical," said Beth Northrop- Day, VP and Assistant General Counsel, US Bank. "We're in a phase right now where companies are still originating, homebuying is occurring, and people are successfully paying their mortgages—all fantastic things. If I were to hazard a guess, I suspect that by mid to late 2019, or perhaps early 2020, we'll start to see some changes. As an industry, we've made so many incredible changes—we are proactive and are working hand-in-hand with borrowers, investors, and regulators." Looking back at the industry's past decade of crisis and recovery, Kim Greaves, EVP, Citizens Bank, told DS News, that most of the "bad players" who precipitated that crises are no longer in the mix, and the industry as a whole is much better prepared for any future downturns than they were before the last one. "However, we will never take our eye off collections, loss mitigation, and default," Greaves said. "at must always remain a strong core competency." Scott Brinkley, CEO, a360, Inc., said, "Interest rates are rising, and consumer debts are at an all-time high. On the other side of the coin, the economy overall is very healthy. Employment is low. Home-price values are appreciating year- over-year. We have some conflicting data points, but we think that 2018 is going to be a bottoming year for delinquencies." If delinquencies do take an upward turn in 2019, however, what would that look like assuming there is no larger precipitating event such as another housing bubble or financial crisis? "We don't anticipate anything broad-based," Brinkley said. "It will all be tied to some major microeconomic event like a recession. Unless that happens, you will not see any material uptake in volume, but you will see a natural increase in delinquencies because the housing market is growing." Sharga said that "the consensus among most economists is that the U.S. is likely to enter a mild recession in late 2019 or early 2020. If that's the case, we'd be likely to see an increase in delinquency rates about six months after the recession starts, and foreclosure activity nine to 12 months later." Even though he doesn't see a recession in the near future, Fannie Mae's Doug Duncan suggests an economic slowdown is coming. "We expect economic growth to slow in 2019, and we expect that the Fed will tighten at least a couple of times during 2019," Duncan said. "Interest rates are unlikely to fall but, depending on the pace to which the economy slows, the Fed may or may not achieve its current dot plot, which suggests four increases next year." Duncan added that Fannie Mae is forecasting only two interest-rate hikes in 2019, owing to an anticipated economic slowdown. e results of the midterm elections will also help shape the industry's path going forward, but O'Reilly cautioned that, even if Republicans are able to continue advancing an agenda that focuses on streamlining and scaling back regulations, the industry might still encounter unexpected complications—a case of "be careful what you wish for." If the federal government continues to scale back on the regulatory front but the states begin to move in the opposite direction, O'Reilly warned that "instead of one regulator with a heavy hand, you could have many, all applying rules in different ways, which would then cause risk-management and compliance costs to skyrocket." As for where home prices are headed in 2019, Duncan says that you can already see some of the trendlines forming. "In every market, the high- end component has seen increased inventory, longer days on the market for existing homes, and slowdowns in prices. In some of those markets, you may see declines in prices if the rate rises increase, and in some cases, because of the high cost of housing, some businesses are moving jobs out of those markets." Duncan added that some of these markets are also beginning to feel the bite of limitations on the deductibility of state and local taxes. In some markets, this could lead to price declines. On the lower end of those markets, however, demand and price appreciation remain strong, so average price appreciation across all the markets is expected to remain positive nationally for the next few years. "en, depending on what happens with the economic activity and the Fed tightening, that pace of price appreciation may go negative in 2021 or 2022," Duncan said. "However, there's a lot of things that could happen between now and then." "e slowdown in housing, and particularly home prices, is the best thing that could have happened, and hopefully it continues in 2019," Kapfidze said. "When we look at previous housing cycles, continued acceleration in home sales and prices would have to come at the cost of increasing leverage—this is how we got in trouble before." "For 2019, servicers should continue to refine their organizations, controls, cost structures, and management and staff structures," Greaves said. "We believe the trend of consolidation will continue, with some smaller companies going out of business, more servicing on the market, and real opportunities for the players that are positioned correctly. e companies that will benefit will be the ones that have their houses in order."

• Cover