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A Tale of Two Exits

The increase in forbearance activity continues to accelerate, with homeowners heading in all directions: exiting, extending, and, for some types of loans, entering forbearance for the first time. With this increased demand, servicers must have a plan in place to track and support maximizing revenue is the use of new digital tools for real-time insights.

The first wave of forbearance exits is well underway, with May marking the tenth week in a row of increased exit rates. The news has been largely positive as many homeowners remain on track with payments.

Mike Frantantoni, SVP and Chief Economist of the MBA, recently noted that “homeowners who have exited forbearance and been able to take up their original payment again are performing at almost the same rate as the overall mortgage servicing portfolio.”

However, those homeowners who remain in forbearance are likely facing ongoing challenges such as lost jobs, reduced income, and other pandemic-related hurdles. Many may continue to fall further behind.

Complicating these concerns are the expiration of extended unemployment benefits and the moratoria on foreclosures. As a result, when this next group hits their forbearance deadlines, they may struggle with loan repayments more than their predecessors.

The Loss Mitigation Waterfall
Servicers know that the key to creating a soft landing for these borrowers post-forbearance is to put the infrastructure in place that supports “muscle memory” for loan repayment. Critical to this is offering maximum flexibility so that consumers can get back on track making on-time payments.

The wide range of lender policies, financial health of borrowers, and a servicer’s own ability to service each loan provide an opportunity to “waterfall” four different repayment options. By offering this cascading flow of plan choices, servicers can help borrowers float between options or choose the one that’s best for their unique circumstance.

  1. Lump-Sum Payment: A one-time payoff that includes all outstanding principal plus interest.
  2. Affordable Repayment Plan: Allowing homeowners to resume regular mortgage payments, plus adding part of their forbearance balance to each month’s payment until they’re caught up.
  3. Deferral or Partial Claim: Deferring the forbearance balance to the end of the loan or employing a junior lien that delays repayment until the homeowner refinances, sells, or ends their mortgage.
  4. Loan Modification. A wide range of options including lowering the interest rate, forgiving some of the principal, or extending terms for homeowners that are unable to continue their mortgage payments.

Servicers need to intimately understand each homeowner’s financial situation in order to recommend the modification or waterfall option that is ideal for them. How has their income changed? Are they paying other bills? What red flags may make an option untenable for them?

Even after a borrower has accepted one of the options, servicers will need to test that they are performing as expected. At a minimum, it’s good to set a three- to four-month trial period, after which a longer term or updated modification can be locked in.

Enact a Digital Strategy Now
No matter the plan or the situation, this process can be a time-consuming and labor-intensive effort if performed manually. Servicers need to gather documentation such as income and expense information, bank statements, expenses, and proof of hardship at every check-in opportunity. Multiply that by the number of the borrowers and the number of check-ins and the burden can quickly become untenable.

The growing number of digital tools available to servicers can help relieve many of these tedious tasks. Servicers should begin planning now while this next tranche of borrowers is still in their original or an extended forbearance period. Extensions provide an opportunity to make sure back-end processes are in place and to explore the digital tools that can best facilitate these programs.

Servicers should look for platforms that deliver on four key areas of functionality:

  1. Live financial health updates
  2. Automating the onboarding of payment applications
  3. Enabling direct communications with borrowers to share payment options and track status
  4. The ability to match payment dates with income to avoid cash gaps or overdue payments.

Digitizing and operationalizing these capabilities creates a superior customer experience while dramatically improving operational efficiency and financial performance. Servicers that embrace digital tools now ahead of the next round of forbearance exits will be better positioned to support the unique customer needs of even more homeowners and grow their business using flexible, optimized repayment options.

About Author: Nadim Homsany

Nadim Homsany is the co-founder and CEO of EarnUp, a financial technology company committed to helping people pay off debt faster and maximize homeownership possibilities.
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