Digital ease boosts mortgage servicing reputations through tough interest-rate stretch

Select mortgage servicers stand out in 2024 in the eyes of consumers because of digital offerings and faster problem resolution.

These features gain attention in a year otherwise characterized by interest-rate headwinds as markets recalibrated expectations for a series of Federal Reserve rate cuts. Forecasters and Fed signals have pushed back the date for the central bank’s expected first reduction to September, to be followed by more action next year.

What’s more, weaker financial fitness among U.S. households linked to sticky inflation, rising revolving credit levels and mortgage payments made past their due date mean that risks loom on the horizon.

These are the findings of the J.D. Power 2024 U.S. Mortgage Servicer Satisfaction Study, released late last month. The study showed consumers giving props to nonbank servicers such as Rocket Mortgage, while bank-affiliated servicers including Regions Mortgage and Chase also scored high.

“On the surface, mortgage servicers’ efforts to elevate their digital tools and customer service are offsetting challenging market conditions,” says Bruce Gehrke, senior director of lending intelligence at J.D. Power.

What to watch: Escrow costs and credit health overall

Gehrke wants financial services strategists to read between the lines.

“Digging a little deeper, the data shows early signs of potentially serious challenges for servicers in the future,” he says. “A proverbial ‘canary in the coal mine’ is the financial health of borrowers, which has materially declined in the past few years.”

Notably, most borrowers are facing rising escrow costs that result in their total monthly mortgage payment increasing. This means the industry has a growing number of at-risk customers facing higher costs, a group that tends to be a lot more expensive to service.

Key findings

The study, based on responses from 15,020 customers who have been with their current mortgage loan servicer for at least one year and fielded from May 2023 through May 2024, turned up some key findings:

• Financial health of borrowers declines sharply: Just 41% of borrowers are currently classified as financially healthy, down from 46% in 2023 and 52% in 2022. Conversely, the percentage of at-risk borrowers is now 19%, up from 17% in 2023. Overall satisfaction scores among financially unhealthy borrowers are, on average, 117 points lower than among financially healthy borrowers.
• Escrow costs are headed higher and borrowers need guidance: Escrow costs—the fees typically rolled into a mortgage to pay annual property tax and homeowners insurance bills—are rising nationwide, with 56% of borrowers experiencing an increase in escrow costs this year. Overall satisfaction is 62 points lower (on a 1,000-point scale), on average, among those who experienced an escrow cost increase than among those who experienced no change. Among those borrowers whose escrow costs increased, overall satisfaction is higher among those who say they had access to tools/information on escrow from their servicer than among those who say they were not aware of such tools.
• Overall satisfaction with mortgage servicers improves: The overall customer satisfaction score for mortgage servicers is 606, up 5 points from 2023. Improvements in problem resolution and satisfaction with digital channels are the primary drivers of this year’s higher scores.
• Controlling costs still a challenge: Self-service is key to keeping costs down. Although satisfaction with the look and feel of mortgage servicer websites and apps improves this year, borrowers say the phone is still the most likely customer service channel to drive a successful outcome and 29% of borrowers still considered this the easiest channel to use. Among those who had a problem, just 49% say their initial contact was calling customer service.

Fed data: Mixed delinquency picture

Other data flashes similar warnings around debt levels. Stability persists for now, but heady levels may impact the health of the mortgage market going forward.

In a separate report released in the first week of August, the Federal Reserve’s New York branch said total U.S. household debt levels edged up in the second quarter, yet overall delinquency rates steadied.

The bank report, part of its survey of household debt and credit conditions, showed that overall debt levels rose by $109 billion, or 0.6%, in the second quarter to $17.80 trillion. Overall borrowing levels sit $3.7 trillion above where they were at the end of 2019 and before the pandemic.

The report also showed that overall delinquency rates remained at 3.2%, unchanged from the first quarter, and still well below the 4.7% rate seen at the end of 2019 before the coronavirus pandemic.

But not all sections of the report can be so quickly dismissed. Transitions in delinquent borrowing levels rose slightly in the second quarter for credit cards and auto loans, which both remain elevated although the pace of worsening slowed. Roughly 9.1% of credit card balances and 8.0% of auto loan balances transitioned into delinquency over the past year.

Delinquency transition rates for mortgages also rose slightly but early delinquency rates for mortgage accounts remained low by historical standards, the Fed’s report noted.

Mortgage balances were up by $77 billion to $12.52 trillion, while auto loan levels increased by $10 billion and overall credit card borrowing outstandings rose by $27 billion by the end of the quarter, to $1.14 trillion. Credit card balances during the quarter were 5.8% above the level they stood at a year ago. Retail cards and other consumer loans were effectively flat while student loan balances declined by $10 billion.

The report also found new mortgage creation levels held steady at $374 billion during the second quarter, in line with the last four quarters, and shy of the levels logged from the second quarter of 2020 to the final quarter of 2021, when very low borrowing costs bolstered the housing market.

This latest look at mortgage market health and overall debt levels hits as bank and credit union strategists assess next steps for interest rates.

The Fed raised its benchmark interest rate to a 5.25%-5.50% range from essentially zero between March 2022 and July last year, where it remains, to keep a lid on high inflation. It has taken some time to keep inflation levels down and some hot spots persist. Throughout lending markets, borrowing costs moved higher in step with Fed policy. Yet the economy showed its resilience to date, in part as businesses and consumers worked through a pandemic-era savings stash.

Fed policymakers have laid the groundwork to begin cutting rates in September now that inflation is near the group’s 2% target rate and recent job market data has seemed to give the Fed any cover it might need to put that pledge into action.

Rachel Koning Beals is Senior Editor at BAI.