How the end of mortgage forbearance impacts the market

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

HousingWire: Hello, HousingWire listeners. Today, I’m joined by Constant.ai, president and COO, Carissa Robb. Listeners, today, Carissa will be speaking to us today about mortgage forbearance and how the housing market will be impacted when this comes to an end. Carissa, thanks for joining us today.

Carissa Robb: Thanks for having me. Excited to be here.

HousingWire Absolutely. Well, before we dive in, can you tell us about yourself and Constant.ai?

Carissa Robb: Sure, love to. So most of my career has been in running large back offices. So I was a prior head of U.S. loan servicing for TD Bank and joined Constant to really dive into the technical capabilities in the loan servicing and lending space a few years ago now. So what Constant does is we’re a fintech company, you know, hyperfocused on modernizing loan servicing, loss mitigation, the interaction really between credit policy, and the consumers, and their experience on the front end.

So the differentiator is we try to partner with those existing providers so there’s no need to overhaul your existing course systems and replace all of your infrastructure. We really try and hit the market where they’re at today and kind of fill in those gaps around self-service features and interactive processes for their consumers, going beyond just, you know, making payments and seeing your statements. We really try to hone in on those areas that are going to be highly regulated.

So loss mitigation is a perfect example. The expiring forbearance plans, even SCRA benefits for active-duty service members, again just trying to streamline that communication between the borrowers and the customers that banks and credit unions and lenders worked so hard to get in the first place and help them retain that business with really easy to use self-service features.

HousingWire: All right. Well, let’s discuss today’s main conversation which will center around mortgage forbearance. It’s now been more than one year since the beginning of the pandemic, which has affected millions of Americans financially. Overall, do you think forbearance moratoriums have positively or negatively impacted the market?

Carissa Robb: Yeah, great question. So I think the initial response was absolutely necessary and positive for millions of homeowners that were in limbo. The unfortunate part was due to a lot of those processes being highly manual and this rapid need to kind of deploy relief, the approach was sort of an all-or-nothing relief package. So what happened was we missed a lot of opportunities to gauge that financial impact, the kind of micro distress factors at the homeowner level.

And so as we unravel that, that initial positive impact of relief and kind of preventing this mass panic on foreclosure, that was the positive impact. That may shift as we start to see the remaining borrowers exit these forbearance plans. And that will be a fairly material shift if you think about going from not making any payments for 12 to 18 months, having the influence of stimulus packages on your housing budget, and then all of that coming due and where we start to return to a sense of normalcy for promissory notes and payment behavior. That could cause a really material shift in not only delinquency but also what homeowners intend to do with that property if they can stay or if they will be looking to exit homeowner status and where they’re going to go. As you know, that decision is going to weigh heavily on financial budgets at the homeowner level.

HousingWire: Right. Yeah, that’s interesting. Well, as previously stated, it’s been more than one year since Congress initially passed the CARES Act to offer economic relief to millions of Americans impacted by the pandemic. Although the number of borrowers and forbearance has slowly been dropping, the Mortgage Bankers Association estimates there are currently 2.23 million homeowners in forbearance plans. Carissa, while forbearance moratoriums have been extended to aid both borrowers and the housing market, how do you think the sector will be impacted once more moratoriums come to close?

Carissa Robb: Yeah, so I talk a lot about the K-shaped recovery and the market’s been paying a lot of attention to this where you have two different segments. You have folks at the top of the K that are recovering, you know, well. They’re okay. And then you have folks at the bottom part of the K that are still struggling, that are still unclear on how they return to a sense of normalcy. So I think that’s really important to acknowledge as we look at the impact of the moratoriums that we may see two different segments of consumers with two very different impacts or severity of impact.

So, again, this goes back to that lack of data where we might be really hard-pressed to differentiate the 2.23 million homeowners from those that maybe took advantage of the forbearance plans as a matter of convenience versus those that took advantage of the plan as a matter of need. And those are lessons that will be really important to unwind operationally just because of the operational burden to answer those phone calls and respond to those consumers. And then also be prepared for the subsequent hardships that may still need to be addressed even after the exodus. I think most of those are planned for late summer and early fall.

So, again, I mentioned it earlier, that behavior, the borrower behavior, the reallocation of cash, you know, what happened during those forbearance plans? Did they increase their debt capacity? Did they buy luxury items? Did they invest it back in their home? Did they put it into savings? You’ll see a variety of different impacts and different plans that happened through these relief periods, and that is going to be what influences their ability and willingness to repay when things start to expire.

And so essentially you’ll have these segments of customers coming out that the folks that can stay and pay, they’re going to leverage the, kind of, reset of their mortgage and continue and leverage their savings and hopefully be in a really positive place. And then you’ll have others that won’t be able to do that. And even that group is going to have multiple segments, those that hopefully still can leverage the equity in their home and look to sell the property. And then those that may look to leverage the moratoriums, leverage the consumer protection benefits and stay in place as long as possible until the foreclosure consequences start to hit the market.

So it’s going to be really interesting to see those, who shows up and how many show up in which bucket or segment. But I think it’s perfectly reasonable to expect an increase in homes that are going to be listed for sale, and then that supply and demand relationship will kind of determine if this equity position that we’re seeing in a lot of the markets will be sustained or we start to prepare more for short sales and foreclosures and deficiency balances.

HousingWire: All right. Well, switching gears here, last month the Consumer Financial Protection Bureau warned mortgage servicers that it’s ramping up enforcement and watching more closely on how they manage borrowers coming out of forbearance. According to the CFPV’s recent complaint report, the volume of overall mortgage complaints increased to more than 3,400 complaints in March 2021 which is the greatest monthly mortgage complaint volume in nearly 3 years. So what are you currently seeing when it comes to servicers helping borrowers exit forbearance and what do you believe the industry should keep in mind during this time?

Carissa Robb: Mm-hmm. So I love this question. During the Great Recession, I ran loss mitigation and dealt with a lot of borrowers that were in need of hardship relief. And so the same challenges that we went through back in 2009 and quite honestly through 2016, you’re starting to see some of those trends resurface in the complaints today. So it’s not all that surprising although it is a little bit disappointing and most of that comes back to tracking of the inventory scalable processes and this reliance on highly manual operations.

And so what that does is it makes it frustrating for consumers to get answers very quickly, and the wait times are often what contribute to the spike in the complaints, just this inability to get transparent answers quickly. There’s a lot of confusion around the qualification for additional relief. So a lot of folks right now are focused on the expiring forbearance plans and then kind of a reset or a recast of that mortgage agreement.

But there are micro issues within an expiring forbearance plan that need to be dealt with, and those are the areas that can kind of frustrate a borrower. So if you think about the escrow accounts, taxes, and insurance payments that are being made on behalf of these borrowers, nothing has been supplementing those balances for 12 to 18 months. And so it’s created shortages. And so either way you look at it, whether your lender is one that’s following the GSC requirements and spreading it out over a longer period of time, or maybe they’re spreading it just over 12 months, which is kind of the norm pre-COVID, you’re looking at an increase in payment above your pre-COVID level and on top of everything we already talked about, right, about the expiring relief packages, the expiring moratoriums for debt obligations. And so it’s just causing this pressure, and not only should banks and lenders and servicers be prepared to handle the operational pressure from high volume but also the emotional pressure that their borrowers are going to be feeling as they start to navigate what normal looks like both from a payment perspective and, again, keeping in mind that this is the most important asset for a lot of borrowers.

HousingWire: So as we continue to discuss the CFPB, I’d like to discuss a rule they proposed in April which aims to prevent services from starting foreclosures until 2022. I’d like to know what your thoughts are on the proposal and how it would affect the housing market.

Carissa Robb: Sure. It’s interesting. If you think about the proposed rule and the moratorium, if most of the borrowers are expiring around September, you’re actually not going to meet the 120-day delinquency requirement if you’re properly recast and starting to resume payments again on October 1 until 2022 anyway. So the moratorium is really saying, “We need a little bit of breathing room to allow servicers that may not be fully automated to prevent the systemic trigger or systemic commencement of foreclosure while they start to take these expirations and translate those into kind of reset modifications so that the borrowers can be current again.”

So I think it’s buying time really to make sure that these unlawful or illegal or unfair foreclosure actions don’t take place because of operational deficiencies that could result in an error or consumer harm. And I think, you know, while the moratorium is one thing because you’re kind of blocking essentially the progress of the sale of homes that just simply aren’t affordable anymore. The hope is that you’re increasing the communication and the workout relief between the borrower and the lender. But the moratorium is, kind of, one piece of the puzzle, and I think the part that lenders and servicers will really benefit from paying closer attention to is UDAAP, the unfair treatment, the deceptive practices, or even abusive practices that could come out of unlawful or erroneous foreclosures simply because of the high volume of demand that’s going to be coming out of these forbearance plans in late summer and early fall.

HousingWire: That’s interesting. Well, there’s a lot of great insight here today, Carissa. But lastly before we go, is there anything else that you’d like to add today or anything else you think our listeners should know?

Carissa Robb: Yeah, I think the media and the market and the regulators, for sure, have done a really good job about increasing their transparency on what’s coming from a regulatory perspective. So I think by now we all know there’s going to be very low tolerance for negative consumer impact for negative experiences and unfair practices. And so a lot of our preparation for the next few months and few quarters even should really focus on preventing those unfortunate errors that do cause consumer harm going beyond the technical regulations and really looking at, “Are we doing the right thing by our borrowers?” I think that’s where, if we can show up a bit more intentionally, a bit more transparently, we will fair much better in the long run than if we just try to follow the technical specs of the rules that are really trying to do the same.

HousingWire: All right. Thank you so much, Carissa. We appreciate your time today.

Carissa Robb: Of course. Thanks so much for having me.