HousingWire recently spoke with Jonathan Willen, chief revenue officer at LERETA, about the upcoming escrow wave, the rising threat of cyber attacks on servicers and what trends he’s seeing in the industry this year.
HousingWire: Servicing has always been a challenging business, but you believe that there are external forces at play that are about to raise the level of difficulty significantly, can you please explain?
Jonathan Willen: Under normal conditions, servicing is a low-margin, highly regulated business with well-understood economic, operational and reputational risks. Our industry is now facing two new threats that are anything but normal. The first is a “perfect storm” that is brewing with escrow accounts and the second is the proliferation of cyber attacks on both servicers and major tech providers.
Let’s start with what’s coming on the escrow front. Over the next few years, dramatic home price appreciation and the downturn in commercial real estate have the potential to significantly increase residential real estate taxes. Over the last four years, Zillow estimates that the average home has appreciated nearly 30%. At the same time, many observers are predicting a downturn in commercial real estate values. The most pessimistic forecast call for a drop of 40% nationwide by the end of 2025. If this occurs, property owners, both residential and commercial, will face higher tax bills.
Meanwhile, homeowners insurance is increasingly becoming a bigger issue for consumers and servicers. A recent Wall Street Journal article noted that in Florida some homeowners have seen their homeowner premiums triple in the last five years and in some communities these premiums are now higher than their mortgage payments. In California, Texas and Louisiana, as well as portions of other states that are at risk for natural disasters, just getting homeowners insurance is getting more difficult as large insurers stop writing coverage.
The combination of higher taxes and insurance premiums has the potential of creating major shocks for millions of borrowers with escrow accounts.
Unexpected increases in escrow accounts are one of the major reasons why borrowers contact their servicers. Resolving these calls often takes time and requires a fair amount of explaining to help homeowners understand why their monthly payment is going up. It will also create economic stress for servicers and investors in dealing with advances and extended payment spreads.
Will all the worst-case scenarios happen all at once? It’s hard to predict, but it is safe to assume that escrow accounts are going to be a heightened challenge for servicers for the foreseeable future.
HW: What can servicers and their tax service providers do to get ahead of the escrow wave?
JW: Based on our conversations with clients, a growing number of servicers are monitoring the coming “escrow cliff” and are beginning to develop proactive programs to reach out to impacted borrowers.
Smaller servicers that focus on a single market or regional footprint are often at an advantage in terms of seeing what’s happening sooner given their in-market proximity.
National servicers may consider using various forms of portfolio monitoring to identify accounts that may be at risk for significant tax or insurance increases. For example, they may choose to run AVMs against properties in markets that have experienced high home price appreciation in order to project possible tax outcomes.
LERETA can provide clients with alerts or reports when a material increase in a single tax bill is identified, assuming these assessments are available earlier in the year. Servicers may want to discuss these and other options with their tax service providers.
To get ahead of insurance issues, servicers may consider data mining their portfolios to identify accounts that are in states or areas that insurers are leaving.
Certain categories of borrowers, like reverse mortgage customers and first-time buyers who stretched to buy homes during the recent run-up in prices, may have an elevated risk of default when taxes or insurance costs rise. So, servicers may want to monitor these accounts more closely.
Going forward we expect to see servicers being more proactive with their communications and outreach on escrow issues. This may take the form of borrower letters, emails and even outbound calls alerting customers to pending tax increases.
They may also employ general messages about these issues on monthly statements, on their websites and even on pre-recorded hold messaging.
Since call centers will be ground zero for these difficult discussions, many servicers will be looking at their training programs, staffing and updating their call center scripts.
HW: Besides the coming escrow wave, you believe that the rising threats of cyber attacks will prompt large servicers to take innovate steps to reduce risks, such as creating redundancies in critical services. How would this work?
JW: Servicers and large players in the mortgage tech spaces were hit with a number of high-profile cyber attacks in 2023, which caused a significant amount of disruption in our industry. For years, large banks and servicers have been investing heavily in staff and technology to harden their technology infrastructure against these attacks. But increasingly they are realizing that they have to go even further and create redundancies in terms of their critical services in case a major vendor goes offline.
This is particularly true in term of time-sensitive functions, such as loss mitigation and closings, where thousands of transactions could be disrupted over a short period of time if a vendor is sidelined.
Ironically, in the tax servicing space where there are only a few major providers, millions of tax payment deadlines could be missed if a cyber attack occurred in Q4 when approximately 60% of all residential taxes are due. While historically large servicers haven’t opted to put back-up relationships in place when it comes to tax servicing, there is now a growing interest in mitigating risk by creating multiple redundant relationships.
We realize that this may appear to be a daunting task to a mortgage servicer who has always relied on one vendor in tax. LERETA is developing tools and resources to make it easier for servicers to create a plan to support this approach. While it may be easier to just keep doing things “the way we’ve always done it,” modern-day risks require equally robust solutions.
HW: What are some promising trends you’re seeing in the servicing industry this year?
JW: The average homeowner doesn’t want to talk with their servicer if they can avoid it, and the servicing industry is investing heavily in technology that gives borrowers the ability to “self-serve.”
The first generation of these initiatives allowed borrowers to see if their payments had been received, to check balances and see what their tax payment was. The next generation will give them deeper, real-time information. For example, answering questions beyond how much did I pay in taxes last year, but also has my tax bill arrived? When was it paid? What’s happening with my escrow account? Should I be making extra payments to avoid a shortage and a big bill later? This level of innovation is coming, and it will not only enhance the customer experience, but it will also help servicers cope with the coming escrow wave.