Servicers prepare to handle forbearance exits
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It didn’t take long for mortgage servicers to realize they had a historic challenge on their hands. As a result of the COVID-19 pandemic, over 22 million Americans lost their jobs between January 2020 and April 2020, the highest level since the Great Depression. Manufacturing production declined to the lowest level since 1946 and new home construction saw the biggest decline in nearly 40 years.
Servicers and politicians were both quick to say they would handle the economic crisis differently than the recession just over a decade ago, in which foreclosures were rampant. Forbearance strategies were negotiated with over 4 million borrowers, evictions were banned and strict guidelines on communiques with borrowers were established in the hopes of avoiding another national housing crisis.
Servicers to date have risen to the occasion, investing in technology and hiring thousands of employees. They have massively reduced the number of forbearances in the 18 months since the CARES Act was passed. But the real test is yet to come: Most forbearance plans only just began expiring in September.
Marina Walsh, the vice president of industry analysis for the Mortgage Bankers Association, is optimistic about the post-forbearance landscape. “The important item here is that we have a lot more tools in our toolkit for borrowers now than during the Great Recession,” she said.
Half of the borrowers exiting forbearance are using deferrals or partial claims (until the pandemic, the option was only available during natural disasters), or are continuing their monthly payments even during forbearance, according to the MBA data.
Meanwhile, as of October, close to 17% did not make all their monthly payments and exited forbearance without a loss mitigation plan. “That’s the group we’re going to be watching,” said Walsh. She added that not all of them will go through foreclosure proceedings because servicers are still formalizing post-forbearance plans.
Some of these borrowers, of course, will not recover. “Going into 2022, assuming that the CARES Act does come to a conclusion, there will likely be more customers that could proceed to foreclosure than in 2020 and 2021,” said Perry Hilzendeger, president of servicing at Homepoint.
Hilzendeger said that customers had not regained their pre-pandemic income levels in some unfortunate situations. “They may not qualify for loss mitigation plans because they don’t have enough income now to support the house that they’re in,” he said.
The number of borrowers who are delinquent on their mortgages — an indicator of future foreclosures — has also steadily declined. According to CoreLogic, the delinquency rate on all mortgages fell to 4.2% in July, a 2.3% drop year over year. Serious delinquencies, in which payments are 90 days or more past due, also fell to 2.8% in July, the lowest level since May 2020.
Contributing to servicers’ optimistic forecast is the labor market recovery. The U.S. Bureau of Labor Statistics found that there were 7.7 million unemployed people in September, compared to 23 million in June 2020. In addition, according to Black Knight, home-owners had $9 trillion in tappable home equity in the second quarter of 2021, a 37% increase year over year that was driven by spiking home prices.
Edward Fay, CEO at Fay Servicing, said that the delinquency rate is closely tied to unemployment and home prices — the expectation is that it will decline as the economy roars back.
“Home prices are way up, so people can sell their homes in a position where they’re defaulting and still walk with cash, and people are now working and can pay their mortgages again,” he said.
The big concern for servicers in the next 12 months is with regulators, notably the Consumer Financial Protection Bureau, now under the stewardship of Rohit Chopra.
Over the last year, the agency has been stern with servicers who are negotiating forbearance exits with borrowers. It ordered servicers to be proactive, evaluate income “fairly,” assist borrowers with limited English proficiency, handle inquiries promptly and prevent “avoidable” foreclosures.
“Our first priority is ensuring struggling families get the assistance they need,” Dave Uejio, the former act-ing director of the CFPB, said in April. “Servicers who put struggling families first have nothing to fear from our oversight, but we will hold accountable those who cause harm to homeowners and families.”
Another regulator, the Office of the Comptroller of the Currency, has also taken an interest in mortgage servicing. In October, the OCC issued a consent order against Cenlar FSB, the nation’s second-largest mortgage servicer, over “unsafe or unsound practices” regarding its internal controls and risk management practices.
“There are so many different regulatory agencies that are putting out their own rules. Servicers have to understand them while trying to figure out what’s best for the customer,” said Fay.
Walsh said all the warning signs are there for servicers to “Follow the rules because there are those that are watching,” she said. “Having risk management controls in place is going to be important.”
This article was first featured in the Dec/Jan HousingWire Magazine issue. To read the full issue, go here.
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