The collection of principal and interest payments has long been a core component of a servicer's role in the U.S. residential mortgage market. Whether the loans are held in an institutional portfolio or in a trust connected to a residential mortgage-backed security, a servicer's primary role is to maximize cashflow for the bank, fund, or investor through the collection of payments in return for a fee. Collecting payments when a loan is performing tends to be a simple and often frictionless process, especially via mechanisms such as automated bank account drafts or online payments. When a loan is delinquent, however, collecting loan payments requires more skill, dedicated resources, and technology, including engaging the borrower to understand their individual financial situation. As we move away from the last recession, these soft skills may fade. The result could lead to difficulties in managing borrowers' performance problems.

Collections staff are essential to the successful collection of payments, and it is often via this unit that a servicer first has contact with a borrower who is experiencing financial challenges making their mortgage payment. Experienced collectors can counsel borrowers on the importance of prioritizing their mortgage payment and reinforce a sense of urgency. They can also accelerate a resolution because they take the time to understand the underlying reason for delinquency and identify sustainable options to resolve and reduce the likelihood of future delinquencies. However, these core collector techniques may have become de-emphasized since the last recession. Moreover, the advent of new technology and the implementation of more streamlined solutions to address delinquent loans may be starting to replace the soft skills essential to the role of the collector.

Over the past few years, markets have experienced a period of benign economic conditions. Nevertheless, persistent inflation has led to strains on the consumer. S&P Global Ratings has observed a multiyear trend of declining promise-to-pay success rates for loans that are 30- and 60-days past due, which is a key performance indicator for collections. These success rates reflect situations in which a collector can work with a borrower who can self-cure by committing to making one or more payments to resolve the delinquency (oftentimes a borrower anticipating a paycheck will commit to using those funds). Despite a slight improvement during the first half of 2024, the promise-to-pay success rates for 30- and 60-day-delinquent loans are still lower than those reported in 2014 (see chart 1).

Chart 1

Inflation And Rising Early-Stage Delinquency Rates

Between 2021 and 2023, inflation hit levels not experienced in over 40 years. Homeowners are facing budget pressures due to rising property taxes, insurance premiums, and interest rates (see "Sustainability Insights: The Impact Of Rising Insurance Premiums On U.S. Housing," published April 22, 2024). This has affected many borrowers' ability to pay their debt obligations, and we have observed an increase in early-stage delinquency rates among our ranked servicers from the recent lows in 2021 (see chart 2). While there could be many factors contributing to this underperformance, a servicer's ability to collect is essential to its management and resolution of the early stages of delinquency.

Chart 2

Collecting In A New Era

Inflation uncertainty will continue to be a key theme in 2025 (see "2025 U.S. Residential Mortgage And Housing," published Dec. 16, 2024). Servicers will therefore need to address any skill gaps they may have in their collections staff, as many have not experienced a period of challenging economic conditions such as those during the last recession. Current conditions differ from those during the COVID-19 pandemic when the cause of financial strain was clearly defined and understood to be transient. It was therefore addressed through temporary assistance programs. Hardships today tend to be more nuanced and idiosyncratic because they depend on individual borrower situations. As such, there is no one-size-fits-all resolution for the collector, which exacerbates the challenge if a collector lacks the soft skills required to engage in detailed conversations regarding each borrower's unique financial situation.

Skilled collectors rely on their training and experience to ask the right questions, obtaining information to better understand the underlying nature of the borrower hardship. They also understand the various requirements of loan resolution options and encourage borrowers to act with urgency, which is especially beneficial for borrowers with late-stage delinquencies. Successful collectors clearly convey to the borrower any requirements and associated timelines, and they can explain the parameters of an approved solution in layman's terms. They are also adept at having the difficult conversation with the borrower about potentially selling their home if they do not qualify for an approved solution. All these skills can make the difference between a successful or unsuccessful resolution.

New technology, creative contact strategies, and scripting enhancements can only go so far to improve a collector's effectiveness. These novel techniques can supplement, but not replace, the human element of a well-trained collector, particularly their ability to improve collection rates and drive the best outcome for stakeholders. The human element of the collector's role should not be underestimated , as a well-trained collector can establish credibility and set expectations for required actions that will help drive a servicer's success in lowering early-stage mortgage delinquency rates. The economic environment has changed in recent years, and persistent inflation could continue to strain the consumer. As early-stage loan delinquencies persist or even increase, successful mitigation will depend heavily on the nuanced communication skills of the collector to address performance issues on a case-by-case basis.