When Congress passed the CARES Act in March 2020, it allowed borrowers of “federally backed” mortgages to ask for a six-month payment forbearance. To date, nearly 7% of outstanding mortgages are now in forbearance versus only 0.25% of loans in forbearance in early March. This number is only expected to increase as more and more Americans file for unemployment and apply for financial assistance. As this crisis unfolds, we see a tidal wave of work in the future for servicers and the need to adopt technology enabled solutions will be crucial.
As a reminder, a forbearance:
Is a temporary postponement of mortgage payments. It is given to a borrower who is facing a short term hardship. The missed monthly mortgage payments are always expected to be paid back at some point in the future, either through a full reinstatement of the loan (a lump-sum payment of missed payments) or through a repayment plan, or through other means. Furthermore, the servicer is obligated to review the borrower’s full financial position at the end of the forbearance period for a “permanent loss mitigation solution.”
Simplified Path to a Fannie/Freddie Streamlined Modification
Forbearance Extensions and Payment Deferrals
Assuming a borrower received a forbearance, what happens next? If the borrower’s COVID-19 related hardship is still unresolved at the end of this initial 6 month period, they can request another 6 month forbearance extension.
A second option is a new “payment deferral” program offered by Fannie Mae and Freddie Mac which will go live in the summer of 2020. The payment deferral is for loans that are no more than 60 days delinquent where the hardship is resolved. For loans that meet that criteria, the missed payments are deferred as a non-interest bearing balance due at the maturity of the loan, refinance, or sale of the property. This option will likely be of limited impact to borrowers impacted by the COVID-19 disaster who are more severely delinquent. Servicers will need to send a payment deferral agreement to borrowers, update their system of record and record the signed agreement.
At some point though, a certain percentage of these borrowers who do not qualify for payment deferral or cannot repay the forbearance amounts will be forced to apply for a loan modification. If servicers considered the forbearance and pending payment deferral volume challenging to manage, imagine trying to process tens of thousands of loan modification requests all happening at the same time.
A loan modification is fundamentally more time consuming to execute relative to a forbearance and payment deferral. For starters, borrowers need a mechanism to answer specific questions for certain streamlined options; or in some cases and depending on the investor, upload necessary documents in order to even be considered for a loan modification. This interface needs to be intuitive and configured and customized to the particular investor requirements. This is actually the easy part.
Workflow and Calculations
Where this problem gets even more challenging is thinking about the actual workflow that is necessary to finalize a loan modification outcome at scale. For instance, a servicer must follow the investor’s hierarchy, which consists of a series of individual waterfall calculations used to determine outcome eligibility. In the case of Freddie and Fannie, the servicer must first evaluate whether the borrower qualifies for a Disaster Cap and Extend Modification (which is its own series of calculations and tasks) prior to evaluating the borrower for any further loss mitigation options. If the borrower fails the eligibility test for Disaster Cap and Extend Modification, they will qualify for a Disaster Flex Modification and the servicer will have to do the following:
- Order a valuation
- Calculate the mark-to-market loan to value ratio
- Determine the principal forbearance cap and amount of principal forbearance
- Determine the borrower’s post modification housing to income ratio, if the servicer has received the borrower’s income
- Update the system of record
In addition, after the loan calculations are completed a service must:
- Communicate the offer for modification to the borrower
- Receive a certain number of trial payments
- Order final modification documents
- Verify the borrower’s title
- Update the title policy
- Persuade the borrower to execute the modification agreement
- Send a notary to the borrower’s residence for the executed modification
- Ship the executed modification document to the Document Custodian
As you can see, there is a material amount of work required just to execute on a Flex Modification. We haven’t even talked about FHA yet, which will be heavily impacted by the current pandemic and does not currently have any streamlined options, where borrower documents such as income evidence are not required. FHA alone has seventeen individual waterfall options within their investor hierarchy and these options include everything from the standard financial assistance requests to disaster specific options as well, all of which have their own specific calculations and workflow related tasks.
We aren’t fortune tellers and won’t predict how many of the 3.5 million current forbearances turn into further delinquent borrowers. But, what we do know is that this tidal wave of loss mitigation will plague the industry for years to come. The problem is currently compounded by the fact that new disaster programs and rules are being introduced almost daily.
And now for the Brace advertisement…we provide all of the tools to execute these problems at scale. We have fully customizable workflow tooling and investor waterfalls which will streamline your operation and allow you to get through this storm with peace of mind.