As the world is starting to recover from the deadly coronavirus pandemic, the financial sectors recover as well. Here’s what to expect in the months ahead.
Expect a long recovery for banking and non-banking financial industries:
According to the global S&P ratings, recovery will range anywhere from 18 months to three years and will vary across jurisdictions. The base case assumes an economic rebound in 2021 following the release of the vaccines. According to calculations and research, there will be an anticipated lag between when an economic recovery takes hold and when the credit strength of the financial industry will stabilize. Even for the least affected–the likely early-exiter banking jurisdictions–stabilization and recovery may take a full 18 months or more after an economic rebound.
Not being adequately prepared:
The industry may not be adequately prepared to manage the upcoming wave of loan modification requests once the forbearance period ends. Among some—if not most services, the lack of standard procedures could make the loan modification process more daunting and stress limited resources. Moreover, failure to help distressed and at-risk borrowers could negatively impact servicers’ ability to effectively minimize and manage delinquencies, loan modifications, and foreclosures.
These challenges may add stress to servicers’ profitability. Fronting mortgage payments, bolstering capacity for forbearances and loan modifications, and managing delinquencies and/or defaults would add to servicing cost, which has already risen significantly since the last financial crisis in 08/09. The financial industry will need to plan for this hurdle and find ways to combat the rising cost of services.
Think long-term, but take short-term action:
1. First, be more proactive.
Anticipate needs, then communicate and empathetically offer clear advice to distressed customers. Focus on identifying stress early to allow sufficient time to develop and put effective solutions in place. Then, actively engage with warehouse lenders and government agencies to manage liquidity constraints.
2. Secondly, be more agile.
Adopt an iterative approach to continuously enhance processes put in place to improve efficiency and reduce risk. Focus on transferrable skills and cross-train employees to scale operations in functions that need immediate attention quickly. Engage third parties, wherever possible, to manage the flow of operations, especially staffing requirements. Ensuring new, complex program guidelines and requirements, such as those of the CARES Act and GSEs, are fully and properly addressed. This can help companies manage operational risks and continue to adhere to applicable regulatory requirements and evolving supervisory guidance.
3. Lastly, be more digital.
Utilize data-driven models to identify which borrowers are most likely to face financial difficulties beyond the deferral period. Provide tailored loan modification solutions. Rapidly deploy digital/cloud-based servicing technology solutions to drive customer engagement, document workflows, and provide key integrations to current technologies to better serve customers. Enhance analytical and reporting capabilities to ensure all mitigation actions proactively offered to borrowers comply with the evolving set of federal, state, and local regulations.
Taking these steps will help you navigate the forecasted recovery period and better prepare your company for long-term success.
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