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» VISIT US ONLINE @ DSNEWS.COM 71 record household income, quarterly net reductions in mortgage debt, and record low rates incentivizing owners to stay put. e 2018 National Association of Realtors "Profile of Home Buyers and Sellers" noted that the median age of FTB remained at 32 years and increased to 55 years for RHB from 54 in 2017. Comparing FTB to RHB, you have two vastly different profiles, especially when considering how each of those segments prefer to engage and communicate with their financial institutions and generational tendencies in utilizing self-service and digital options. A NEW FRONTIER Is there such a thing as too much of a good thing when talking about cheap money? Yes, the obvious will point to over-leveraging and inflation. ere are signs of this today with household and corporate debt achieving new highs. e one I am focused on is the unintended consequence and unprecedented factor of a majority of homeowners possessing long-term fixed mortgage rates that may never be seen again. Considering that most homeowners took advantage of the post-crisis refi boom, rising rates could lead to declining existing home sales. For example, if you consider home price appreciation and mortgage rates that are 50-100 BPS higher than your existing mortgage, a $250,000 home at a 3.5 percent fixed rate that realized a modest rate of 15 percent appreciation with an interest rate of 4.5 percent would result in a 30 percent increase in a principal and interest payment. To gauge how many homeowners today could benefit from a rate of 4.5 percent, Black Knight recently estimated that 550,000 homeowners could realize a 0.75 percent decrease in rate. e combination of home price appreciation and customers remaining in their loans longer should net a much larger amount of equity for the average household and potentially curtail existing home sales further. is is key going forward for servicers of first liens. How will customers react to default when possessing a sizable amount of equity? How will modification rules and underwriting concerning equity impact them? A study by the Federal Reserve Bank of New York's Center for Microeconomic Data shows that total household debt increased by $32 billion (0.2 percent) to $13.54 trillion in Q4 2018. It was the 18th consecutive quarter with an increase, and the total is now $869 billion higher than the previous peak of $12.68 trillion in Q3 2008. One thing to note in this report was that mortgage debt quarter-over-quarter (QOQ ) saw a decline of $26 billion, while student, auto, and credit card debt all experienced increases. e flow of serious mortgage delinquency QOQ also experienced just a 1 basis point uptick to 1.19 percent. e lack of issuance of private-label and subprime MBS in the last 11 years points to a major shift in credit and risk standards. According to Inside Mortgage Finance and eMBS, under conservatorship, the agency share of residential MBS has grown from less than 50 percent or $4 trillion in 2006 to 96 percent or $6.5 trillion in 2018. Also, the mean and median FICO scores on new purchase originations have both increased by 21 and 20 points over the last decade, while the 10th percentile of FICO scores, which represents the lower bound of creditworthiness needed to qualify for a mortgage, stood at 644 as of March 2018. Prior to the housing crisis, this threshold held steady in the low 600s, according to Urban Institute. ese trends show the emergence of a new type of consumer. Will equity preclude borrowers from loss mitigation, sparking a higher frequency of bankruptcy filings? Do modification guidelines need to be revisited to address these situations? ese are some questions that servicers will need to answer to form a strong strategy moving forward. THE NEXT GENERATION OF SERVICING STRATEGIES Servicing strategies will be driven by consolidation in both the bank and nonbank sectors as mortgage volumes continue to decline and margins shrink. According to Business Insider and JPMorgan, the industry retail cost per loan has ballooned by 50 percent since 2014, jumping from $6,000 per loan to now $9,000. We will also continue to see slowing in home price appreciation and home sales until we reach stagnation or modest negative levels, at which point, I foresee regulators taking action—rates dropping and sideline buyers coming in. e other "X factor" to consider while looking at servicing the current housing market is the yet-to-be-seen impact of the more than 200,000 homes that single-family rental real estate investment trusts (REITs) have amassed. Although it's a relatively small slice of the pie compared to the total housing market, these REITs tend to be concentrated in certain markets. us, the next generation of financial services institutions must deliver an on-demand and customized digital customer experience to remain competitive. Institutions will be judged by how they optimize their use of data, the speed in which they execute, and by the ease of use of their digital platforms/tools and user experience. e lack of issuance of private-label and subprime MBS in the last 11 years points to a major shift in credit and risk standards. Under conservatorship, the agency share of residential MBS has grown from less than 50 percent or $4 trillion in 2006 to 96 percent or $6.5 trillion in 2018.

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