Servicers ramp up operations amid forbearance challenges

Preparing for the unprecedented year ahead

F1-feb - magazine article

Last year brought with it one of the most surprising years housing has ever seen, but for mortgage servicers, their work has only just begun. 

As 2019 came to a close, economists vigorously debated the chances of a recession in 2020. While divided, many suggested that a recession would be a possibility near the end of last year or even in early 2021. Others said we wouldn’t see any sort of recession until at least 2022. 

Then COVID-19 made its appearance. 

And while it did bring about a recession in 2020 as job losses mounted and stay-at-home orders slowed down the economy and even forced many businesses to close their doors for good, its effect on housing was unprecedented. 

Because of the low interest rates brought on by the pandemic and the divided economic impact that the pandemic had on certain demographics (which hit renters the hardest), the housing industry boomed, seeing record-high home sales and mortgage originations, a strong demand for homes and rising home prices. 

At the end of 2020, some of housing’s top economists, including economists from the Mortgage Bankers Association, Haus, CoreLogic, Redfin, Zillow and more, penned their forecasts for the year ahead, predicting that this year will continue to see a surge in home sales and originations as well as rising home prices. Interest rates will remain low, but could see some lift from last year’s all-time lows. 

But for mortgage servicers, this year could get significantly more complicated, even when compared to the unprecedented changes in 2020. However, they are hard at work trying to ensure that they are prepared to handle this year’s twists and turns. 

Training and staffing: Scaling up mortgage servicers

Once COVID-19 began to spread, the Federal Housing Finance Agency stepped in, putting a stop to foreclosures and loosening policies at Fannie Mae and Freddie Mac to help homeowners who are struggling to stay in their homes. 

And in the Coronavirus Aid, Relief and Economic Security Act, the government mandated that servicers must offer forbearance options to all borrowers, even if they don’t offer proof of financial distress. While this was done in part to expedite aid to homeowners, it also caused a period of confusion and chaos in the servicing industry. 

Despite all of these changes, 2021 could have even more in store for mortgage servicers. The data from MBA at the end of 2020 showed the number of borrowers in mortgage forbearance programs continued to slowly improve. But there was still an uptick in new borrowers applying for forbearance options. 

“More borrowers sought relief, with new forbearance requests reaching their highest level since the week ending Aug. 2, and servicer call volume hitting its highest level since the week ending April 19,” said Mike Fratantoni, MBA senior vice president and chief economist. “Compared to the last two months, more homeowners exiting forbearance are using a modification – a sign that they have not been able to fully get back on their feet, even if they are working again.

“The latest economic data is showing a slowdown, particularly an increase in layoffs and long-term unemployment,” Fratantoni said. “Coupled with the latest surge in COVID-19 cases, it is not surprising to see more homeowners seeking relief.”

At the end of the year, more than 2.5 million borrowers remained in some sort of forbearance plan, according to MBA data.

In addition to putting more borrowers into forbearance in the coming months, servicers will also begin to see other borrowers emerge from forbearance, and will need to work to get them back on track with their mortgage payments. And servicers are gearing up.

Over the past few months, Mr. Cooper has hired more than 900 new team members in its customer support centers and redeployed team members across the company to ensure its customers have all the necessary resources available to them to better understand forbearance offerings. 

The company also said it is ramping up its technology capabilities including the launch of new digital tools such as its digital forbearance platform, which made getting assistance more of a seamless process.

“This particular solution not only relieved the strain on our customer service team, but it also allowed customers to evaluate their needs individually and select plans that are best suited for them,” said Kurt Johnson, Mr. Cooper chief credit officer. “To date, more than 90% of customers who utilized the digital tool were able to self-serve online without having to call with questions or assistance.”

Training will also take center stage for servicers hoping to avoid confusion and give better customer service during unprecedented forbearance periods. 

“Training your staff on the forbearance plans and post-forbearance options is also critical,” Johnson said. “We have trained more than 1,000 team members on the new forbearance process, and training continues as customers exit those plans.”

Many servicers have been increasing their staffing since the beginning of 2020, but for those that need more coming into 2021, it will be better to hire them sooner rather than later, said Chris Zimmerman, Wolters Kluwer Compliance Solutions senior technology product manager.

“Staffing and training are areas that servicers have been addressing since the onset of the CARES Act,” Zimmerman said. “In anticipation of increased loan volumes, servicers ramped up call center staffing in addition to adding loss mitigation staff to address the volume of borrowers needing post-forbearance assistance.

“Not all borrowers are requiring a full year of forbearance, and many borrowers have already been able to exit forbearance,” he said. “As a result of the uncertainty on the duration of a forbearance plan, servicers needed to address initial staffing needs early on. Servicers continue to look to hire additional loss mitigation staff to manage the number of borrowers who will be exiting forbearance into 2021.”

Avoiding a foreclosure surge through mitigation

At the start of the pandemic, there were many fears about what would happen to borrowers emerging from forbearance periods. Would they have higher monthly payments? Would they owe one lump sum? Would it just be tacked on to the end of the loan?

But now, as forbearance periods come close to ending, it appears borrowers may even be able to set up lower monthly payments than they had before the pandemic – thanks to low interest rates. 

“For customers who were current going into the pandemic, there are numerous, easy-to-access solutions that will allow customers to make payments that are equal to, or in many cases lower than, the payments they were making before the pandemic,” Johnson said. “Post-forbearance options range from moving all past due payments to the end of the loan without interest, to capitalizing the amounts into the loan and re-amortizing the loan, often at a much lower rate than on the existing loan. Exploring these options ahead of when your forbearance ends will allow you to make an educated choice.”

Investor and insurance guidelines require that servicers begin reaching out to borrowers before their forbearance period is set to expire. From there, they must work with borrowers on various loss mitigation options, including new COVID-19 loss mitigation programs. Overall, while there could be an uptick in foreclosures, experts expect these types of efforts will prevent the type of foreclosure surge seen in the Great Recession. 

“While a population of borrowers will inevitably face foreclosure, loss mitigation programs coupled with equity associated with increased home values should prevent the type of foreclosure surge we saw during the housing crisis,” Zimmerman said.

Indeed, many economists expect rising home prices to play a major role in preventing a foreclosure crisis. 

“Given how much home prices have surged over the past four months, I actually think it’s unlikely we’ll see a large pickup in foreclosures,” Haus Chief Economist Ralph McLaughlin said at the end of 2020. “Unlike the Great Recession, impacted homeowners today likely say their home goes up in value rather than down, so there’s less incentive to walk away.”

Emerging forbearance trends

While it is difficult to say what to expect in the year ahead (especially after a year as unpredictable as 2020), housing experts and servicers are optimistic about borrowers’ abilities to resume mortgage payments. 

“COVID-19 hardships are temporary in nature,” Zimmerman said. “It’s largely anticipated that borrowers will be able to pick up where they left off once exiting forbearance and receiving a post-forbearance workout. That said, trends are difficult to predict and will require ongoing monitoring with the uncertainty tied to the significant number of COVID-19 cases, job market and economic recovery.”

And Johnson agreed lower interest rates and cash-out refinances will be popular among borrowers emerging from forbearance in the year ahead. 

“Before the pandemic, and still today, hundreds of thousands of homeowners had interest rates above 4%,” he said. “It’s increasingly becoming more attractive for homeowners to consider refinancing to lower their monthly payments and benefit from today’s record low-interest rates.

“We can also expect to see homeowners tap into their home equity for a cash out refinance,” Johnson continued. “As work from home continues to be the new standard, homeowners are looking for ways to finance home improvements and renovations. Leveraging home equity may be a smart decision for many homeowners looking to build a home office and we can expect this trend to take off in early 2021.”

The role of tech

Technology came a long way in 2021, partially due to the natural trend but also because stay-at-home orders suddenly made tech options a non-negotiable for companies looking to stay in operation during the pandemic.

In the year ahead, technology will continue to play a vital role in mortgage servicing, and servicers will be forced to adopt or get left behind. 

“Because servicing, quite frankly, is done from a technology standpoint that’s pretty antiquated,” said Bob Walters, Rocket Companies president and chief operating officer. “Our industry is on the precipice of really changing. In 10 years, our industry won’t look anything like today.” 

As mortgage servicers look to improve their processes, they are upgrading their tech to include features such as consumer self-service options, rules engines with instant decisioning and much more. 

“The mortgage industry has embraced technology through digital solutions this year as the pandemic has created new challenges changing all aspects of the mortgage experience,” Johnson said. “We expect that we’ll continue to see the industry make investments in technology to streamline processes, improve efficiencies and create more self-serve options. In the past there has been a lot of focus on tech for the originations business, but servicers must also focus on digital when it comes to loss mitigation and loan modifications.”

The mortgage industry is quickly making up ground in its technology development as it catches up to the rest of the modern world. But mortgage servicing is lagging. However, the one bright side to this is mortgage servicers can look to the originations side and other parts of the industry as an example of what types of tools and technology will best fit their needs. 

“The pandemic environment should move the servicing industry more quickly towards the digital experience,” Zimmerman said. “The servicing industry has historically been behind other lines of business, such as origination, when it comes to adopting digital solutions. Well-established standards in the origination space can serve as the foundation as servicing moves towards the full digital experience, which will significantly improve the borrower experience in the current pandemic environment and also longer term.

“As more states continue to adopt electronic and remote online notary capabilities, servicers will have an even greater opportunity to leverage electronic capabilities to deliver and execute loss mitigation documents,” he said. 

Are mortgage servicers ready?

Perhaps the million-dollar question as the housing industry nervously looks back at the chaos that followed the last recession: Are mortgage servicers ready to deal with the fallout that will follow in the coming months or even years? The answer, reassuringly, is a resounding “yes” from the industry. 

“Servicers are largely prepared going into 2021,” Zimmerman said. “The industry has been applying lessons learned since the housing crisis. Loss mitigation programs and technology have adapted to better position the industry for success. With the uncertainty in today’s pandemic environment, servicers will need to continue to be prepared to adapt, based on market conditions. If 2020 taught us anything, expect the unexpected.”

In October 2020 at the MBA Annual convention, Federal Housing Finance Agency Director Mark Calabria took the opportunity to recognize the effort mortgage servicers were making to help borrowers in forbearance and even thanked them. If you remember the lashing servicers used to get regularly from the stage at another MBA convention (albeit from the Consumer Financial Protection Bureau), this felt a little surreal. Clearly, the mortgage industry isn’t in the hot seat for this recession.

“If you had asked at the beginning of the year whether servicers would be ready for a pandemic that resulted in about 10% delinquency rates, an unprecedented number of new loss mitigation solutions and 100% work from home, even for call centers, I am not sure the industry would have said they were prepared,” Johnson said. “However, the technology available in the industry has changed so much from the last housing crisis that most servicers were able to take the events of the year in stride.

“While we never want to be cavalier about our ability to handle what 2021 may throw at us, we believe that as an industry we have become more agile and able to handle larger disruptions in shorter periods of time,” he continued. “We are also able to offer our customers more solutions and 24/7 information via web and mobile apps. While we realize there will be challenges related to expirations of forbearance plans and foreclosure moratoria along with a new set of leaders at HUD and other housing agencies, we believe that as an industry we will be more able to adapt quickly to changes that come our way.” 

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