The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act was designed to provide economic relief from the impact of COVID-19 to both businesses and to affected American citizens. With unemployment claims spiking week-over-week to more than 6 million on Thursday, the long-term impacts of the pandemic are still a rapidly developing area of speculation. Nevertheless, one area of discussion within the mortgage industry is adapting to new forbearance guidelines established by the CARES Act, and how the industry can best weather the current crisis in the face of logistical, staffing, and liquidity concerns. A new white paper published by Aspen Grove Solutions puts these concerns under the microscope.
The white paper—entitled "Forbearance in the CARES Act: A Review of Issues, Impact, and Mitigation Strategies"—can be read in full here.
As the white paper explores, the CARES Act creates significant changes to current forbearance processes for government-backed loans, which amount to roughly $6.9 trillion in asset value. In addition, the streamlined forbearance processes on offer are both very generous to homeowners and restrict some established forms of servicer diligence, which could lead more borrowers to utilize the programs than normal and put added strain on servicers.
“These are tough times for everyone—but servicers have made tremendous improvements since 2008, and expectations are high that they can do their part to minimize the pain and accelerate our recovery,” Sean Ryan, CEO of Aspen Grove Solutions, told DS News. “Aspen takes our responsibility to our industry and stakeholders seriously—including borrowers, servicers, vendors, and our own people. That’s why we developed a plug-and-play homeowner forbearance module that servicers can get up and running in days to manage the process while relieving customer anxiety.”
As the white paper explains, the total value for government-backed loans of deferred P&I could exceed $107 billion, depending on the duration of the forbearance. In addition, the paper states that deferred taxes, insurance, and HOA fees could total more than $48 billion.
"Current legislation does not yet relieve servicers of the requirement to advance these funds," the paper notes.
It is also likely that properties with forbearance on loans will require ongoing drive-by property inspections to ensure the property remains occupied, thus adding further costs for servicers.
Additionally, the impact of loss mitigation activity on post-forbearance financial results has the potential to be profound. Based on data from previous natural disasters, if 55% of borrowers with forbearance plans require a modification, then a 20% forbearance uptake rate could result in over 3.8 million modifications.
"A wave of loan modifications is almost certain to result at the end of the covered period, and FHA is likely to offer further guidance to avoid a wave of defaults from harming borrowers, the property market, and its insured portfolio," the paper states. It also adds that "although servicers cannot gather documentation for forbearance approval, they may be able to gather documentation after the forbearance is initiated in order to prepare for efficient resolution (including possible modification) after the forbearance period ends."
Servicers are also advised "to carefully evaluate how they wish to manage non-government backed loans."
“Servicers have to consider the tail on this issue, not just the immediate forbearance,” Ryan added. “They need to plan for it and put in place solutions now—there will be more loss mitigation, short sales, and deeds-in-lieu. There will be more preservation, inspection, foreclosures, and REO. Avoidance of any downstream legal jeopardy is also critical. Systems are critical to that.”
Despite the challenges being presented, the white paper concludes that servicers with the right expertise, technology, and partnerships in place can emerge from this crisis with minimal harm.