Faith Schwartz, Christy Moss, CMB: What Happens When COVID-19 Starts Affecting Mortgage Payments?
Faith Schwartz is president of Housing Finance Strategies and a member of FormFree’s board of directors. In 2007, the Housing Policy Council and the Treasury Department appointed Schwartz executive director of the newly formed Hope Now alliance, a cooperative effort among government, counselors, investors and lenders focused on helping distressed borrowers through the financial crisis.
Christy Moss, CMB, is executive director of partner relations with FormFree, Atlanta. Before joining FormFree, she worked at Fannie Mae during the financial crisis and spent more than a decade working with lenders as part of the GSE’s affinity partner relationships team.
COVID-19’s economic impacts are only beginning to be felt in the United States, and already it’s been a wild ride.
In the span of less than a month, we’ve seen mortgage rates fall to an all-time low only to rebound with the largest single weekly increase in history. Record-breaking loan application volumes have origination teams operating at a fever pitch, and behind closed doors, industry leaders are working just as hard to prepare for the next wave of economic impacts.
Chief among these is the expectation that COVID-19 will negatively impact household income for many Americans, threatening homeowners’ ability to pay their mortgages. It will be in our industry’s best interest to assist these homeowners in distress, not only from a moral standpoint, but also because of the significant risks mortgage delinquencies pose to investors and to the holders of mortgage servicing rights. When loans go into foreclosure, everyone loses — consumers, communities, servicers and investors.
Though the health emergency we now face is quite unlike the financial crisis of 2007-2008, that troubled chapter nonetheless gives us a good idea of what to expect this time around.
1) The GSEs Will Lead the Way
Mortgage servicers will be looking to the GSEs as well as FHA for explicit guidance on what loss mitigation steps are most appropriate. As the severity and duration of COVID-19’s impacts on our domestic economy are not yet known, mortgage relief programs may roll out in waves, starting with short-term fixes like forbearance and progressing, if needed, to more extensive foreclosure mitigation tactics such as loan modification programs or even a temporary moratorium on foreclosures.
Common sense suggests that certain mortgage servicing requirements, such as FHA’s requirement that servicers have a face-to-face interview with borrowers as part of early default intervention, will be waived in light of the COVID-19 contamination risk posed by nonessential social interaction.
2) Borrower Outreach Should Be Swift, Simple and Complete
Mortgage servicers have a responsibility to communicate foreclosure mitigation options to consumers in a timely manner, and that communication should be as complete and easy to understand as possible.
For instance, it will be important for consumers to understand that any loan amounts that are forborne continue to accrue interest and must be repaid at the conclusion of the forbearance period. In addition, consumers should understand that lenders may report forbearance arrangements to credit reporting agencies.
While we don’t yet know when the GSEs will issue their guidance, lessons learned from the financial crisis will motivate all parties to act swiftly as soon as any significant uptick in defaults occurs. For now, we’ll just have to “wait and see.” Though the administration has downplayed the likelihood of a full-blown economic recession, already the economy has taken a beating from COVID-19. The House passed a coronavirus relief bill over the weekend to help small businesses and workers. It may be a matter of weeks or a matter of months before the full economic impacts of COVID-19 are understood.
3) Modern Tools Can Remove Unnecessary Stress, Cost from Default Intervention
It’s not yet known to what extent borrowers will be asked to document claims that their employment or income has been affected by COVID-19. Whatever the GSEs decide, the good news is that borrowers are in a much better position today than they were 12 years ago to share their financial data with servicers. Instead of waiting to receive a financial package from the servicer, borrowers can share direct-source asset, employment and income data — including paystubs — in minutes from any smartphone.
Streamlining data validation not only reduces the burden placed on already-distressed homeowners, but also saves servicers money. At five to 10 times the cost of normal servicing, default servicing is dreadfully expensive, and only a portion of that expense is reimbursed by investors. Servicers should take advantage of any cost savings they can find.
COVID-19 is poised to cast a dark cloud on the national economy for months to come. If there’s a silver lining, it’s that we’re entering this crisis from a position of economic strength. With the lessons learned during the housing crisis and 12 years of technological development on our side, we’re well positioned to help consumers, servicers and investors weather the storm.
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