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Working Without a Crystal Ball

This piece originally appeared in the June 2022 edition of DS News magazine, online now.

Increasing mortgage rates, coupled with a hot housing market, have some pundits prepping for economic doom and gloom and the eventuality of a housing market crash. The reality is that today we are in a much different scenario than the great recession of 2008, so it's unlikely that we will see a repeat of that foreclosure crisis, but that doesn't mean you shouldn't begin prepping for trouble ahead.

Furthermore, what should be understood is that the current housing market is on a path of its own. This isn’t a case of everything old is new again; there is a perfect storm brewing for the unprepared, and taking the right precautionary tips will prevent your default servicing from going down with the ship.

What’s New Is New Again
The incredible demand for housing, coupled with limited supply, means this hot housing market shows little sign of letting up. At the same time, we are beginning to see the strains that higher interest rates have on consumers. Higher mortgage rates have already dampened some plans for home purchases. Here's the other side of this: some homeowners are just returning to their monthly mortgage obligations now that the foreclosure moratorium is lifted, and they are still struggling.

During the pandemic, millions of people got mortgage forbearances that put their mortgage payments on hold. Most have indeed been able to resume their debt obligation payments and end their forbearances in 2020 and 2021. Still, homeowners who remained in forbearance into 2022 might be more likely to be suffering permanent financial hardships.

Black Knight analysis said the number of post-COVID-19 delinquencies in active foreclosure rose by 13% in March as pandemic-era protections began to wear off. The data shows that some 279,000 borrowers—two-thirds of whom were already delinquent before the pandemic—remain past due after exhausting both forbearance and loss mitigation options; 78,000 loans are in active foreclosure post-forbearance, up 8% from the same time last month.

ATTOM, parent company to RealtyTrac, the largest online marketplace for foreclosure and distressed properties, released its Q1 2022 U.S. Foreclosure Market Report. It found nationwide that one in 1,795 housing units had a foreclosure filing in the first quarter. A total of 50,759 U.S. properties started the foreclosure process in Q1 2022, up 67% from the previous quarter and up 188% from a year ago. Across the country, foreclosures in March were up 181% from a year ago.

The uptick in foreclosures shows that the pandemic-era protections on housing are beginning to wear off. The concern is that the added pressure of inflation which has raised costs for consumers across the board, may make it even harder for struggling homeowners.

It's not that a crisis is in the works, but the numbers tell us that now is the time to get a plan for default servicing requirements.

Beware the Regulator
The mortgage market is entering this default servicing phase in an increased regulatory environment. The Consumer Finance Protection Bureau (CFPB) has prioritized mortgage servicing oversight under the new administration. That means default servicing loan reviews need to be closely examined to remain regulatory compliant.

After the Great Recession of 2008, we saw a similar level of scrutiny. Under President Barack Obama's administration, the CFPB had a tremendous amount of teeth. Servicers fined for violations turned to us to retune their plans.

They hired us to review their servicing practices for two reasons: they wanted to do it right and didn't want a multi-million-dollar fine from the CFPB.

As the market enters a new cycle of foreclosures, lenders and servicers have to adjust to the post-pandemic world and help borrowers transition into other permanent loss mitigation alternatives or default. Lenders and servicers need to accept that mortgage servicer regulatory scrutiny will also increase in 2022 as the need for default servicing increases. Now is the time to assemble a plan to tick all the regulatory boxes.

As my colleague, Meghan Jones-Rolla, noted in a recent issue of DS News, the CFPB is tasked with providing greater oversight than what was considered appropriate in years past. That is to say, the national regulator is simply increasing activity to a level generally considered to be appropriate for today's market conditions.

Getting a Plan in Place
Servicers may not have had a foreclosure department over the last two years because there was no need for it. Suddenly, they are faced with scaling up this department as foreclosures begin to pile up. Lenders and servicers need to assume that there will be a bigger number of foreclosures than what they are currently dealing with, and that means getting a workforce in place to deal with the anticipated volume. It also means training this workforce to execute servicing requirements properly.

Having a suitable system to deal with your servicing needs means acquiring talent and training that talent while volumes increase, without which can lead to costly mistakes. Enforcement actions and resultant fines could rise with greater scrutiny from various regulators stemming from elevated customer complaints. The bottom line here is that your people need to know how to operate within the current regulatory environment. Lenders and servicers also need to line up the right vendors to deal with property preservation, title work, and foreclosure.

Shoring up the right vendor support system is key to running a successful servicing business. The goal for your default servicing plan should ultimately be to show the regulators that you did everything you could to keep that homeowner in their home. That means showing that you put the right plan in place and hired the right people.

The good news is that, since the Great Recession of 2008, many servicers have enhanced systems and processes, investment in technology and increased automation, allowing servicers to respond to regulatory concerns more effectively.

The ability to get the products is a lot easier. And that technology facilitates the ability to order the property, title, valuation, lawyers—everything needed for foreclosure. The downside is that this technology hasn't been tested in a high-volume scenario.

Without a crystal ball, it's hard to say just how much of a turn the market will take. Lenders and servicers can be sure that inflation-driven spending and higher borrowing costs will make it difficult for homeowners already struggling to keep up with payments. We need to be ready for that eventuality so that it doesn't blindside the market. And being prepared means knowing the rules, whatever they may be, and validating within the loan file that that they're following the rules.

About Author: Dru Jacobs

Dru Jacobs is president of ADFITECH, a Mortgage Connect company. He has also managed business development, underwriting, and compliance auditing. Jacobs is a past member of the FNMA QC Liaison Committee and has conducted seminars and training sessions on fraud, quality control, compliance, underwriting, and appraisal review.
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