Mortgage servicers are preparing for a wave of delinquent mortgages and possible foreclosures to hit the market, but say they have already taken steps to mitigate their impact.
The U.S. government made mortgage forbearance available to any home loan borrowers in the early days of the COVID-19 pandemic, and those who took up the option then are now entering their last possible quarter of relief. That period will end in September, after which borrowers will need to start making payments again, sell their homes or go into foreclosure.
Under the first mortgage bailout programs in both the government and private sector, borrowers were allowed to delay making payments on their home loans for up to a year. That was later extended to 18 months. Every three months, borrowers must contact their lender to inform them they wish to continue forbearance.
Data from the financial services firm Black Knight shows that around 7.25 million American borrowers took part in forbearance programs at some point during the pandemic. That represents 14% of all homeowners who currently have mortgages. Of those, 72% have since exited forbearance, leaving just 2 million who are still active in the programs.
CNBC reported that 575,000 borrowers’ forbearance plans will expire at the end of September and in early October. For mortgage servicers, it means they face dealing with a deluge of troubled loans all at once.
Mr. Cooper Chief Executive Jay Bray told CNBC in an interview that his organization was “definitely ready” for the coming wave. He explained that his company has added more staff to get ready for the onslaught, and moved others from handling origination to loss mitigation. Mr. Cooper is said to be the largest non-bank mortgage servicer in the U.S.
“It will be significant volume, but we are more than ready for that,” said Bray. “Working with all those folks and the stakeholders, I think we’ve got some great solutions.”
Mortgage servicers have been helped by the government sponsored entities Fannie Mae and Freddie Mac, which along with the Federal Housing Administration have issued new guidelines for borrowers who’re exiting forbearance programs. The guidelines are meant to assist borrowers that will still struggle to pay their loans. The assistance includes more interest rate reductions that will be made available through loan modifications.
Acting FHA Director Sandra Thompson said last week that allowing more families to qualify for interest rate reductions would help to prevent unnecessary foreclosures.
For mortgage servicers, it’s generally in their interest to keep as many borrowers as possible inside their homes, because the foreclosure process is very expensive. Many are likely to offer borrowers loan modifications if necessary, reducing their interest rates and tack their missed payments onto the end of the loan rather than insisting these are made up in their monthly repayments.
Borrowers who cannot afford to pay have the option of letting their home fall into foreclosure, or selling the property, which may even net some a decent profit in the current red-hot housing market.
The Consumer Financial Protection Bureau has also updated its guidance on how mortgage servicers should handle borrowers who exit forbearance programs. Part of that entails improving outreach by servicers, in addition to helping them streamline loan modification processes.
Cowen Washington Research Group’s financial services and housing policy analyst Jaret Seiberg told CNBC that one major positive change to the CFPBs rules is that mortgage servicers are now allowed to approve a borrower for a loan modification even if they don’t have all of the information they need from that individual.
“This is key to quickly delivering relief,” Seiberg said. “As the CFPB notes, as many as 3% of mortgage borrowers are at least four months behind, and that means they could face foreclosure [as soon as they exit forbearance].”
For all of the efforts made by mortgage servicers and the assistance being forwarded to borrowers, there will almost certainly be a jump in foreclosures in the fall and winter anyway. That’s because some borrowers will simply have no other recourse. However, Mr. Cooper’s Bray insised that while it’s difficult to put a number on expected foreclosures, it would be nothing like the crisis that followed the Great Recession in the late 2000s.
“When you look at the tools that we have today and the ease of coming off of forbearance plans, I think it’s just so much simpler than what we saw in the past,” Bray said.
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