Tomorrow (April 1st) is the due date of the first significant wave of mortgage payments since the Coronavirus began disrupting the economy. The operational impact of COVID-19 on mortgage bankers—and servicers in particular—has been swift and dramatic. It will not soon subside. Its financial impact remains on the horizon but is likely to be felt over a more extended period.
Whereas borrower inquiries related to the Coronavirus accounted for zero percent of servicer call volume as recently as March 16th, within a week they have spiked to more than 25 percent of inquiries at one servicer. Another servicer reported receiving over 20,000 calls relating to forbearance relief during the same period.
We are officially in a new world. The next several months appear to hold chaos, disruption, and potentially devastating losses for mortgage servicers. When delinquencies associated with April 1st payments start to hit, the financial impact—felt primarily through P&I, T&I, and corporate advances, additional collection and compliance costs, and the loss of servicing fee income simply because fewer payments are being made—has the potential to linger considerably longer than the liquidity and funding crisis currently rocking financial markets.
Having a roadmap for navigating impending financial, credit, and operational dilemmas has never been more important.
Market dislocations created by the speed and seriousness of COVID-19 are constraining (and will continue to constrain) servicers’ tools for responding to and resolving a forthcoming tsunami of delinquencies, foreclosures and REOs. The ability of servicers to manage through this will be further complicated by external factors that will dictate when and how servicers will be able to manage their businesses. These are likely to include various forms of government intervention, such as payment holidays, mandatory forbearance, foreclosure moratoriums, and modification programs. While protecting borrowers, these programs will also add layers of complexity into servicer compliance operations.
In addition to introducing new sets of moral hazard issues for the servicing of mortgages, increases in delinquencies and illiquidity of trading markets will seize the trading markets for servicing portfolios, limiting mortgage bankers’ access to cash. Investors, guarantors, and insurers will increase their oversight into servicer operations to minimize their losses.
RiskSpan has been working with its mortgage banking clients to construct a modeling framework for assessing, quantifying, and managing COVID-19 risk to servicing operations and income statements. The framework covers the full lifecycle of a servicing asset and is designed to forecast each of the following under several defined stress scenarios:
- Principal and interest advances
- Escrow (T&I) advances
- Corporate advances to cover foreclosure, liquidations and REO expenditures
- Financing and capital implications of delinquent and defaulted loans
- Repurchases, denials, and rescissions
- Compensatory fees and curtailments
In addition to projecting these financial costs, the modeling framework forecasts the incremental operational costs associated with servicing a portfolio with increasing shares of delinquencies, defaults, bankruptcies, liquidations, and REOs—including all the incremental personnel, compliance and other costs associated with servicing a portfolio that was prime at acquisition but is suddenly beginning to take on subprime characteristics.
Contact us to talk about how RiskSpan’s operational risk assessment tool can be customized to your servicing portfolio.
The Federal Reserve Board (FRB) recently released regulatory guidance outlining its capital planning expectations for large financial companies. The guidance addresses many areas of the capital planning process where regulators are looking for continued improvement within large bank holding companies and attempts to clarify differences in the Fed’s expectations based on firm size and complexity. The guidance is effective for the 2016 CCAR cycle.
The Federal Reserve has provided separate guidance for two different categories of large financial institutions:
- LISCC Firms1 and ‘Large and Complex’ firms were provided capital planning guidance under SR 15-18, and
- ‘Large and Noncomplex’ firms were provided capital planning guidance under SR 15-19.
SR 15-18 Summary
Specifically, SR 15-18 applies to firms that:
- Are subject to the LISCC framework,
- Have total consolidated assets of $250 billion or more, or
- Have consolidated total on-balance sheet foreign exposure of $10 billion or more.
For the largest and most complex firms, the guidance clarifies expectations that have been previously communicated to firms, including through past Comprehensive Capital Analysis and Review (CCAR) exercises and related supervisory reviews.
SR 15-19 Summary
SR 15-19 applies to firms and ‘Large and Noncomplex’ institutions that:
- Are not otherwise subject to the LISCC framework,
- Have total consolidated assets between $50 billion and $250 billion, and
- Have total consolidated on-balance-sheet foreign exposure of less than $10 billion.
Implications of these capital planning guidelines
Both sets of guidelines (SR 15-18 and SR 15-19) lay out the governance, risk management, internal controls, capital policy, scenario design, and projection methodology expectations relating to the capital planning process. They also lay out some important distinctions between the two institution types relating to how models and model risk management are expected to be used.
We summarize some of the key differences between what is required of these two institution types in the table below.
Current 2017 LISCC Portfolio Firms
According to the Federal Reserve, here are the current LISCC firms:
- American International Group, Inc.
- Bank of America Corporation
- The Bank of New York Mellon Corporation
- Barclays PLC
- Citigroup Inc.
- Credit Suisse Group AG
- Deutsche Bank AG
- The Goldman Sachs Group, Inc.
- JP Morgan Chase & Co.
- Morgan Stanley
- Prudential Financial, Inc.
- State Street Corporation
- UBS AG
- Wells Fargo & Company
 Large Institution Supervision Coordinating Committee (LISCC) – the Board of Governors of the Federal Reserve has the responsibility for the supervision of systemically important financial institutions, including large bank holding companies, the U.S. operations of certain foreign banking organizations, and nonbank financial companies that are designated by the Financial Stability Oversight Council (FSOC) for supervision by the Board of Governors. A list of LISCC firms can be found at http://www.federalreserve.gov/bankinforeg/large-institution-supervision.htm.