Since the CARES Act was signed into law, homeowners across the U.S. have taken advantage of its mortgage relief provisions. In fact, as of November 2020, a total of 6.5 million borrowers had been, or still were, on a COVID-19-related forbearance plan, either through the CARES Act or another program.
Fortunately, the forbearance programs and foreclosure moratoria have protected many Americans from losing their homes during the pandemic. Thanks in large part to these programs, the sort of housing market crisis of the 2008-2009 Great Recession has thus far been avoided.
At the onset of the COVID-19 crisis in the U.S., as servicers worked to quickly help borrowers in need of assistance, significant operational challenges began to emerge. Many of these challenges persist today, while new ones – like post-forbearance credit reporting, investor and year-end reporting for deferred balances – continue to arise. As we move into 2021 and the subsequent rolling 12-month expirations of forbearance plans throughout the year, new challenges will become even more pronounced.
The ability to quickly identify and address these operational challenges on an ongoing basis is crucial for servicers to maintain efficient and effective borrower assistance, while complying with the CARES Act and other government, state and local requirements.
Clearly, the faster that operational issues can be resolved, the less strain imposed on a servicer’s day-to-day processes as well. This is especially important since high volumes of borrower inquiries are expected to continue as borrowers forbearance periods end.
Looking back on the first few months of the crisis, one of the biggest challenges servicers faced was putting systems and processes in place to handle the massive influx of customer inquiries. But, like many other businesses, servicers were transitioning to a remote workforce, making it difficult to field these urgent borrower calls.
Of course, servicers had experienced large volumes of borrower calls after the Home Affordable Modification Program (HAMP) launched in 2009. With HAMP, though, these inquiries came in over an extended period of time. After the CARES Act was enacted, the calls started pouring in the next day.
The fact that by the beginning of May, there were close to 4 million borrowers in forbearance plans illustrates just how high the volume climbed in a very short period of time. Servicers that offered robust customer-facing digital and online applications, with intuitive capabilities and clear communication mechanisms, were certainly in a better position to handle the influx.
When does the 180-day period begin?
Under the CARES Act, borrowers with federally backed loans can request an initial 180 days of forbearance, and ask for another 180 days once that period is over. The GSEs also require servicers to attempt to make contact with borrowers before the initial six months have expired to find out if forbearance-plan extensions or other options are needed.
Sounds straightforward enough, but determining the 180-day threshold has been problematic for many. For example, some borrowers decided to continue making payments initially after their forbearance plans were set up. In these situations, when does the 180-day period begin — when those loans were set up on forbearance or when payments stopped?
Many borrowers were initially on 90-day plans, due to the uncertainty about how long the COVID-19 crisis would last. In some instances, servicers could not get in touch with these borrowers to determine if an extension was needed. For those situations, there was really no choice but to place borrowers on a 180-day plan. Again, servicers faced the question of when to start counting the 180-day CARES Act forbearance period.
Blocking and tackling
Servicers also had to do a considerable amount of blocking and tackling after the crisis’ onset. From the suspension of auto-drafting and late fees to determining what information bills should include, numerous issues kept cropping up.
Under normal circumstances, these types of issues are easily handled, even when a relatively large number of borrowers are affected during a natural disaster, for example. However, with the unprecedentedly large volume of loans impacted during the COVID crisis, it quickly became a significant operational and compliance challenge.
Let’s take the example of suspending automatic payments. Many borrowers were current on their loan before they went on a forbearance plan. Because they were current on payments, the servicer’s system of record may not have triggered auto payments to stop. A servicer could have deleted borrowers’ check-drafting data to resolve the issue, but then would be inundated with thousands of customers calling to get their drafting information set back up once forbearance ends.
Having a configurable servicing system that could be updated quickly to stop auto payments was key for helping servicers successfully address these types of ongoing challenges.
Current and approaching challenges
In May 2020, the FHFA announced that Fannie Mae and Freddie Mac would allow payment deferrals as a forbearance-repayment option for homeowners. This option enables borrowers to defer their missed payments until the home is sold, refinanced or paid off.
The impact of deferral plans on investor reporting is a critical issue that needs to be addressed. With deferral plans, servicers are required to combine the borrower’s missed payments, including principal, interest and escrow, and report the total sum – not a breakdown – to investors.
But here’s the dilemma. What happens with IRS reporting when the borrower pays off the loan? The IRS will want to know what portion of the payment consisted of interest. Servicers will need to work closely with their technology provider or IT department to understand the functionality their systems can deliver for tracking this information, especially since some loans may be in the system for 30 years.
Servicers are now challenged with managing the massive volume of loans that are ending their 180-day forbearance period. Each faces the daunting prospect of finding out, from thousands of customers, if an extension is needed.
If an extension is not requested, the servicer will next have to engage in active loss mitigation efforts with their customers. This will most likely take the form of a waterfall approach to various workout plans, loan modifications, or – ultimately in the wort case scenario – starting foreclosure.
To help avoid the latter, there may be more mortgage-relief programs enacted, especially with a new administration coming to Washington D.C. in January 2021. A newly emboldened CFPB is quite likely, and we may see new regulatory moves geared to helping struggling homeowners.
So, in addition to contacting each customer on a COVID-19 related forbearance, servicers need to be fully apprised on the latest regulatory enhancements and compliance requirements – on top of the myriad loss mitigation plans already in place.
Robust technology that evaluates borrowers for loss mitigation options regardless of the investor, insurer, loan type, policy or program is critical during this time. The technology will also need to facilitate quick decisioning, while helping servicers remain complaint.
Helping facilitate a “soft landing”
Unfortunately, some borrowers who were current on their payments before going on a forbearance plan will not be in a position to take advantage of deferrals, partial claim plans or loan modifications.
The industry will need to come up with ways to help these consumers experience a “soft landing.” Many of them might be able to purchase a less expensive house and start over, instead of being wiped out by the COVID crisis.
As we all know from the Great Recession, it’s not beneficial to anyone – borrowers, servicers, investors – nor to the economy overall – to move forward with a foreclosure that could be avoided. Thankfully, the housing market remains robust, equity positions are by and large very strong and many, if not most, homeowners could sell to avoid foreclosure without facing a loss. Hardly ideal, but a better outcome than the alternative.
As the uncertainly and difficulties related to COVID-19 continue, servicers will likely face more challenges. To successfully navigate new issues that come up, servicers should have multiple channels in place for efficient and effective borrower communication.
By working closely with their technology partners, servicers can better understand how to improve the functionality their systems deliver to help streamline operations, support their compliance efforts and stay connected to borrowers, while ongoing COVID-19 issues continue to impact the mortgage market.