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Preparing for the End of Forbearance

Editor's note: This piece originally appeared in the August 2020 edition of DS News, now available.

It’s not too late for mortgage servicers to prepare for the next pandemic-driven event—a likely rise in loan modifications and loss mitigation requests.

Charles Dickens and Mark Twain may have been contemporaries, but they sure didn’t see eye to eye when it came to time management. Dickens is known for the line, “Procrastination is the thief of time,” while Twain’s view was, “Never put off till tomorrow what you can do the day after tomorrow.”

While funny, there’s more than a kernel of truth in what Twain says. Too often, in our industry and elsewhere, companies wait until the last minute to react to change—until it’s almost too late. Or it is too late.

Fortunately, it’s not too late for mortgage servicers to prepare for the next pandemic- driven event, namely a likely rise in loan modifications and loss mitigation requests when forbearance periods end. Whether they’re ready to follow the advice of Dickens or Twain remains to be seen. But there are definitely reasons to act now.

Not As Bad As 2008 ... But Just Wait 

Throughout our industry, comparisons are being made between today’s financial crisis and the Great Recession. There’s an eerie feeling as though we’re all watching a reboot of a movie we’ve seen before. But this version is quite different. For example, servicers are being tested by simultaneous spikes in volume both from forbearance requests and refinancing, which we’ve never seen before. These have historically been countercyclical.

The most significant difference, though, is the fact that no one saw the pandemic coming. The 2008 crisis was caused primarily by an unhealthy housing market, and it built up over time due to loans being made to people who couldn’t afford them and inflated property values. This time, the financial
crisis isn’t being driven by economic factors, nor through any fault of consumers. In fact, property values overall are generally holding steady thus far, so there’s optimism that the current crisis won’t last nearly as long as the previous one.

There are other positives. Compared to 2008, the government’s response to the current crisis has been much better.

While millions of Americans have filed unemployment claims, many did not have to because of the Paycheck Protection Program (PPP), which enabled businesses to keep workers on their payrolls. Meanwhile, the FHFA’s forbearance plan to allow borrowers to skip payments and add them to the end
of their loan terms has been a huge relief to homeowners who truly needed some financial breathing room. Luckily, we have been in an agency/government market since the last crisis so FHFA could respond impactfully.

While the FHFA’s decision brought stability and clarity to the unknown, however, it also means that an enormous number of loans will have to be modified when forbearance periods end. Since more than four million loans are currently in forbearance, we’re expecting an enormous spike in loan modifications. Even half of this number would be huge. Most servicers don’t have the means to underwrite many loan modifications. Nor are most servicers prepared for the wave of defaults that will likely follow from borrowers who will be unable to continue paying their mortgage because of permanent job loss.

Yet another difference between the two crises involves human resources. When
loan originations ground to a near halt during the 2008 recession, many mortgage company employees were able to switch from origination roles to servicing roles. Today, on the other hand, there are fewer people to keep up with the demand for both refis and loss mitigation assistance, especially with the pandemic forcing businesses to move to remote workforces.

Why Upgrading Your Technology is Crucial

As it stands, there are not enough bodies in the servicing industry to deal with the continuing demand for refis in addition to loan modification requests and other loss mitigation efforts. Making matters worse is the fact that there has been relatively little adoption and implementation of new technologies within individual servicing shops.

That’s because the thing servicers need most of all is technology capable of automating all the different processes that they’ll need to ramp up in the weeks and months ahead.They also need technology capable of identifying which borrowers in forbearance will be most likely to qualify for a loan modification and tools to assist in qualification requirements when at the loan level. And they need technology that enables borrowers to digitally sign their modified loan documents.

Fortunately, it is possible for lenders and servicers to get all these tools today, and ideally in the same platform. For example, unlike during the past crisis, new tools are available that can apply predictive analytics to large amounts of data to determine which borrowers need help immediately and the type of help they need. Essentially, servicers can predict outcomes in ways they couldn’t during the past crisis. By having the tools in place to handle those outcomes, they can streamline their operations, avoid losses, and get help to the borrowers who need it most. For example, predictive analytics can help servicers determine borrowers that are most likely to experience income and job loss based on the types of jobs they have. For loan modifications, they can also be used to make sure borrowers can afford their new payments. In addition, they can consider the myriad factors that impact these outcomes, such as debt-to-income and loan-to-value ratios and credit scores, to create the best outcomes for both the borrower and investor. And by predicting outcomes, they can also create plans on a loan-by-loan basis.

Applying predictive analytics is basically about taking six million servicing records and running them through machine-learning tools to determine trends based on a borrower’s profile, loan details, and other information. With the right technology and sufficient data, analytics can create decisions with an accuracy rate in the high-90% area.

Predictive analytics had already been proven to be a useful servicing tool well before the pandemic. There are vendors available with this technology, and the services to go along with it, such as SmartDocs, which allow lenders to capture data and store entire loan files digitally. For servicers that are strapped with resources, these technologies can help alleviate the current stress and prepare for the wave of loss mitigation requests and loan modifications.

On a larger level, an unintentional benefit of embracing these solutions will help increase adoption of eSignatures, eNotes, and eVaults—whether it is a re-origination process in a refinance or modification. Unlike last time, it has been an agency/government market, so policy is consistent for treatment of borrowers. And with Ginnie Mae now accepting eNotes, another obstacle has been removed for a large sector of the existing population of loans.

What Servicers Should Be Doing Now 

Right now, servicers should be analyzing their portfolios to identify which borrowers are the best candidates for a loan modification and zero in on them. We can be reasonably sure that many borrowers suffering permanent job loss will not be able to afford to modify their loans. But by examining all their mortgage files now, servicers will be able to separate out those who may qualify once the forbearance period ends and prepare to move them through an express modification process.

The biggest advantage of great servicing assisting technology is the ability to free up the people who are best positioned to help borrowers through the loss mitigation process. The bottom line is that there is only a finite supply of people who will be available to handle the increasing volume of refinances, modifications, and loss mitigation efforts. Similar to how point-of-sale technology and automated LOS platforms enable loan officers and processors to get more done, new servicing technologies can take the heavy lifting out of the decision-making process. This will enable servicers to leverage their human staff to focus on more complicated scenarios and guide borrowers through the process.

These technologies weren’t available 12 years ago, but they are available today. And there is no better time for servicers to take advantage of them to scale their origination and servicing needs to meet spikes in demand that we know will come. The best way to get started is to partner with a technology provider that not only has all the tools servicers need in a single platform—including predictive analytics—but already embraced a remote workforce before the current crisis.

As many organizations have already discovered over the past several months, outsourcing critical business functions and technologies to the right partner can make a huge difference. Some have learned this lesson very painfully. By choosing correctly, however, servicers will be in a better position to scale rapidly when needed to handle the challenges ahead.

There is no precedent to today’s situation, and many unknowns remain. For instance, since borrowers didn’t have to qualify for forbearance, we simply don’t know how many of them really needed it or not. Whatever the case may be, we won’t know the effect it will have or what borrowers will do when forbearance periods end.

We also still don’t know how long today’s crisis will last. While businesses are reopening, and the economy is picking back up, at the time of this writing the pandemic does not appear it will end anytime soon. Plus, no matter what we think of COVID-19, we have seen some uptick in re-openings due to increased testing or letting our guard down. Indeed, we may already be heading toward a second wave of coronavirus cases. That could ultimately create further financial disruption and place even greater pressures on servicers. We’re telling everyone to prepare for the worst.

Given everything we know—and don’t know—procrastination isn’t just an unwise move for mortgage servicers. It’s a self- imposed death sentence. In other words, don’t listen to Mark Twain, because even the day after tomorrow could be too late.

About Author: Paul Anselmo

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Paul Anselmo brings more than 30 years’ experience in the banking and mortgage industries. Prior to founding Evolve Mortgage Services, Anselmo served as President and CEO of Mortgage Resource Network, a business process outsource and technology provider to the mortgage industry, which he founded in 1999. Anselmo has held a variety of positions during his career, including Partner and EVP for a firm providing due diligence and origination support services to the mortgage industry, becoming the largest vendor to the RTC. He spent 15 years in the banking industry and served as a senior officer for an $87 billion bank holding company from 1982 to 1993.
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