PERSON OF THE WEEK: As the first rounds of forbearance periods come to an end, servicers will be met with rising numbers of borrowers who are still suffering financially and trying to determine what their options are – or perhaps not trying at all, in the case of borrowers who may be ghosting their servicers by not making payments without a plan.
Under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, homeowners with federally backed mortgage loans, regardless of delinquency status, can get a forbearance by simply asking and affirming a financial hardship caused directly or indirectly by COVID-19. The forbearance period will last up to 180 days and can be extended up to 180 additional days (360 days, or around 12 months, total).
What is elusive for mortgage servicers right now is the ability to forecast how many of the borrowers who opted for forbearance will become current on their loans once the forbearance period ends. Although vaccines are now being distributed, the virus is spreading more quickly and lockdowns appear imminent during the first quarter. These lockdowns, in turn, will impact the economy and lead to possible increases in unemployment. How quickly the economy will recover after the pandemic recedes is difficult to predict.
So how can mortgage servicers prepare for this likely wave of defaults? Chetan Patel, chief operating officer for Verity Global Solutions, shared his views with MortgageOrb.
Q: What will the end of forbearance periods mean for servicers? What about the potential for many borrowers to not make their payments?
Patel: It’s going to be very challenging for servicers because so many borrowers don’t understand all their options. There’s still a lot of confusion about the COVID-19 related forbearance plans being offered. In fact, many borrowers still believe that they have to make all of their missed payments at once at the end of forbearance, which is typical with traditional types of forbearance, but not true with COVID-19 forbearance plans.
In a forbearance agreement, unlike a repayment plan, the lender usually agrees in advance to allow you to miss or reduce your payments. At the end of the forbearance period, you either pay the amount of skipped payments in a lump sum, add an extra amount to your regular payments each month until the entire skipped amount is repaid, or complete a loan modification, in which the lender adds the unpaid amounts to the balance of the loan. If you need a lower monthly payment at the end of the forbearance period, a modification might accomplish this goal, too.
In the first stage of forbearance, the borrower will need to call their servicer and request a forbearance due to economy hardship. Most servicers will automatically provide a six-month plan. At the end of the six months, the borrower can call back and say, for example, “I still don’t have a job,” and they are given an additional three months. They can also apply for another six months of suspended payments, but they need to fill out paperwork for that. Even though borrowers may be desperate for help, however, many don’t know what to do – and in many cases, they don’t do anything.
There’s a bigger problem approaching: If borrowers don’t exercise their options, lenders will have no option but to start the foreclosure process. Under today’s regulations, servicers will be facing lots of challenges to remove people from their homes. At some point, the federal government, through the housing agencies, will have to step in and provide additional relief for borrowers until they can get their finances back on track. In the meantime, however, servicers must be the ones to start the conversation with borrowers who need help.
Q: When reviewing loan files, what are some indicators that show a borrower could be at risk of not paying their mortgage at the end of a forbearance period?
Patel: The biggest indication that a borrower is not going to be able to resume their mortgage payments is their credit behavior. If you do a soft pull on a borrower’s credit and see their balances are going up, that’s an indication that they are leaning on credit cards to pay for day-to day living expenses. Of course, credit doesn’t tell the full story, because utility payments for water and electricity aren’t reported to the credit bureaus. But you can get enough of an idea to determine whether a borrower is in trouble from what is reported.
On home equity loans, servicers should be continually monitoring when borrowers are drawing money out to see if they are using their equity for living expenses, which can be indicated by unusual draw patterns. Let’s say a borrower has been drawing $5,000 a year on a $100,000 home equity line of credit. If they start drawing $1,000 at the end of every month, that may be a sign they are having financial issues and are using their home equity to pay monthly bills. If that’s the case, the borrower needs to be contacted to discuss their options.
For borrowers who are in forbearance, servicers should be monitoring the borrower’s credit profile. If they see patterns that seem odd, they can proactively reach out to the borrower and say, “We are reaching out to some of our borrowers to provide assistance with their mortgage payments. If you’re having difficulties, we can extend your forbearance plan or look for other options until things get better.” Usually, a trusted third party can help servicers monitor borrower behaviors to see if there’s a reason to contact someone who may really need help.
Q: What do you recommend servicers do now to reach borrowers who might still be facing financial difficulties and need a plan to make payments?
Patel: If a servicer suspects a borrower is still having financial difficulty, they should use any legal means available to reach them, including text messages, emails and mail campaigns. The problem is that mortgage volumes are at record highs right now. If you’re a lender/servicer, your origination team is probably stealing all your customer service reps because the demand for refinancing today is so high. In most cases, the best course of action is to leverage the experience of a trusted outsourcing partner that will likely do a much better job of staying in touch with borrowers who may need help.
Q: How can servicers best shift their focus from refinances to loss mitigation—and how can they do both well?
Patel: Many lender-servicers simply don’t have the bandwidth to do both refinances and work with customers who really need assistance. In fact, many can’t even keep up with refinance volume. I know of one large lender that brought in 20 to 30 customer service agents over the past several months just to keep up with their volume. They have an automated system taking the borrower’s information and putting them in a queue for a callback, but their agents are three to four days behind in returning those calls.
This is only going to get more challenging as default rates are already starting to increase and are expected to grow next year. For many servicers, the best course of action is to outsource the processes that take the most manpower to mortgage BPO experts, so they can focus their teams on working one-on-one with customers. Over the past two months, we’ve been hiring servicing specialists in preparation for what we know will be a huge demand from servicers for help.
Depending on a servicer’s portfolio and risk level, and since one approach won’t work for all, how can they determine the best strategies to navigate the influx of late payments and loss mitigation?
Every servicer is different, and the proper strategy will depend on the types of loans they have in their portfolio and what sort of loss mitigation options are available. The obvious route for many servicers will be to hire more people in order to handle late payments and determine the loss mitigation options for each individual borrower. However, this can be incredibly expensive and challenging, especially if you’re training people who have no prior experience in these areas.
In most cases, the better strategy is to determine which parts of the servicer’s operations can be outsourced or automated through technology, then identify a provider with a track record of providing core servicing processes and loss mitigation assistance, including non-contact borrower support. The right partner can help servicers take an extraordinary amount of work off their plates and reduce costs—and do it very quickly, too, while working entirely behind the scenes.
Q: As we move into 2021, with COVID-19 concerns remaining high, what is your outlook on borrowers and forbearance plans?
Patel: It’s going to be challenging. I’m sure we will see many borrowers extend their forbearance plans beyond their current periods, even up to two years. I expect we will see support for this from the federal government, too, because foreclosure should always be the last resort for a lender or an investor. If you have borrowers on forbearance, there’s still the chance that the borrower can work out their difficulties. It’s really hard for borrowers to recover once the foreclosure process starts.
Servicers need to be thinking about this now, because by June of next year, we will be seeing increasing foreclosure rates that could get as high as 4.5% or even 5% of all mortgages. That wouldn’t be as high as the peak default rate of 7% during the housing crisis, but it would be up there. The good news is that servicers still have time and resources available to them to manage the growing number of borrowers extending or coming off forbearance plans and to find the right strategy for helping them.