The COVID-19 pandemic has and will continue to have a profound impact on the U.S. residential mortgage servicing industry. Data compiled from the U.S. Department of Labor reflected that for the 11 weeks since March 21, 2020, approximately 42.6 million Americans have filed for first-time unemployment claims. Per a press release issued June 1, 2020, by the Mortgage Bankers Assn. (https://newslink.mba.org/mba-newslinks/2020/june/mba-share-of-mortgage-loans-in-forbearance-increases-to-8-46/), approximately 4.2 million homeowners have entered into forbearance plans as of May 24, representing 8.46% of all mortgages in its sample size of nearly 75% of all first-lien residential mortgages. As homeowners continue to file unemployment claims, with a concurrent increase in call volume to their existing servicer as they seek mortgage assistance, these figures could worsen depending on when and how successfully each state reopens their economy when they decide to do so and the impact of any additional government assistance that may be offered to these borrowers.
Borrowers may now request a six-month forbearance with a possible extension for another six months for government-backed loans by contacting their existing servicer. Nongovernment backed loans (e.g., private-label and whole loans) do not have universal options afforded to these borrowers. We believe, however, that the servicers of these loans will likely provide similar initial forbearance options analogous to options provided in previous natural disaster events.
Forbearance is not forgiveness. These forborne payments will have to be paid back at some point in time either through a repayment plan or some other loss mitigation option. The Federal Housing Finance Agency and U.S. Department of Housing and Urban Development recently clarified program requirements to specifically note that the lump sum of missed payments is not due in full at the end of the forbearance period. The existing servicer must work with the borrower by the end of the forbearance period to determine the best possible loss mitigation solution. Some potential options include setting up a repayment plan, offering a modification that reduces their monthly payments, or creating a more permanent payment deferral so the forborne amounts due are added to the end of the mortgage and not payable until sale, refinance, maturity, or other qualifying event.
During the Great Recession, financial organizations such as banks sold their delinquent loans to special servicers more suited for this type of labor intensive servicing with expertise in handling defaulted accounts. Though special servicing previously was heavily focused on nonperforming loans, many of these servicers have shifted over the years to re-performing loans as delinquencies and, concurrently, the economy, improved significantly since the Great Recession. Concomitantly, many special servicers adapted their operations to "prime" servicing in addition to continuing special servicing following the improving metrics.
The current situation presents servicing opportunities particularly for nonbank special servicers depending on how other servicers decide to address the default situation in their portfolios as it evolves throughout 2020 and depending on the financial strength of nonbank servicers to pursue mortgage servicing rights or subservice these portfolios. Obviously, challenges remain as special servicers will have to ramp up staffing and training to address the probable increase in delinquencies and loss mitigation efforts. We believe, based on unemployment filing volumes and the extent of the hardship, that most borrowers will require some form of permanent option such as a deferral of forbearance amounts to the end of the loan or a modification to be successful in retaining their homes. Otherwise, there could be a significant amount of forbearance payments due that would be difficult for many borrowers to repay in a lump sum or even with a long-term repayment plan in place.
There are many unknowns at present regarding homeowners' ability to repay these deferred amounts. During the Great Recession, there was a dramatic increase in collection, workout, and other default proceedings that greatly stressed servicers who were not prepared for such large volumes from an operational and technological perspective. Assuming borrowers cannot regain their prior positions at their companies, are negatively impacted by reduced wages, or are unable to find new employment, there could be a similar dramatic increase in default activity.
Servicers may not have the capabilities to review, approve, process, and service what could be a significant amount of loan modifications, as was the case during the Great Recession, which is a paperwork intensive task even when documents can be uploaded electronically. Additionally, not all modifications will succeed, which would result in increased foreclosure and/or bankruptcy filings. Although many servicers learned from prior mistakes related to missing documentation, extended decision timelines, and other errors, they may elect to transfer these loans to special servicers for future handling. This will require substantial coordination between the companies as the loans transfer to ensure all documents and data are correctly transferred and appropriate contact with the borrower is maintained through a designated single point of contact. In a recent bulletin, the Consumer Financial Protection Bureau laid out the expectations for servicing transfers, which included providing additional clarity on the transfer process as well as additional details designed to facilitate compliance and prevent borrower harm.
Once the enormity of the delinquent loan population becomes clearer, servicers will need to determine their strategies to handle the expected unprecedented volumes of mortgage assistance requests, including possible transfers to a special servicer. Special servicers maintain specific knowledge and expertise in handling defaulted mortgage loans that may again be called upon by banks and other servicers unable or unwilling to continue to service these loans. However, it's unclear whether special servicers will be able to meet this challenge now, immediately after shifting their own operations in more recent years to suit the previously improving delinquency environment.
- Servicer Evaluation Spotlight Report: U.S. Residential Mortgage Servicers Gear Up To Face COVID-19 Related Challenges; April 10, 2020
This report does not constitute a rating action.
|Servicer Analyst:||Steven L Frie, New York (1) 212-438-2458;|
|Secondary Contacts:||Mark J Shannon, New York + (404) 989-7655;|
|Adam J Dykstra, Columbia (1) 303-721-4368;|
|Analytical Manager, Servicer Evaluations:||Robert J Radziul, New York (1) 212-438-1051;|
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