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Limiting Mortgage Servicing Risk in Turbulent Times

defects on loan applicationTo help anticipate and contain losses in the shadow of the pandemic and the ongoing economic fallout, the Wall Street Journal reports that some homebuyers are being asked upfront if they anticipate any income-related changes or whether they plan to seek out a forbearance plan.

The prerequisite is in the form of a new document included in the closing paperwork for some borrowers. According to forms reviewed by the Journal, the forms—known as “COVID-19 borrower certifications”—often ask homebuyers to confirm changes to their income aren’t anticipated and outline potential penalties that could apply if any of the certifications are later proven inaccurate.

The form additions could help services better anticipate and mitigate against risk inherent in lending during a concurrent health and economic crises. As the WSJ story reports, "the current recession has made it particularly hard to determine who is creditworthy: Millions of Americans are behind on their debts, but their missed payments aren’t reflected in their credit scores or uniformly recorded on their credit reports because of protections in the stimulus law."

When government agencies first began announcing expanded forbearance programs alongside various foreclosure and eviction moratoria, one of the primary industry concerns was maintaining liquidity during an challenging economic time that no one is certain the eventual length or extent of. With so many unknowns, it's unsurprising that lenders would do what they can to anticipate potential risks and help mitigate negative blowback against both their organizations and the homeowners in question.

Through the $2 trillion coronavirus stimulus package Congress greenlighted early during COVID-19, homeowners who are encountering difficulty can request as many as 12 months of forbearance on federally backed home loans. The upshot of that? On a temporary basis, they can put a freeze on their payments and make them down the road instead. That said, however, securing government backing on a newly made loans can take days—if not weeks or months.

Loans already in forbearance can be offloaded by by lenders and servicers. This spring, when GSEs Fannie Mac and Freddie Mac indicated they’d start purchasing loans in forbearance, it would be at a discount of 5% or 7% of the value of the loan, incumbent on whether the borrower was a first-time homebuyer. While indicating it would insure loans in forbearance, the Federal Housing Administration added it could assess the lender a 20% fee should the loan enter foreclosure.

Fannie Mae, Freddie Mac, and Ginnie Mae, back more than 70% of outstanding U.S. mortgages, according to the Urban Institute.

The share of mortgages in forbearance: 7.2%, is in the clutches of a 10 consecutive week descent, according to Mortgage Bankers Association. Nevertheless, that still hovers substantially above levels pre-dating the pandemic. Only 3,750 loans will be subject to the forbearance penalty, according to Urban Institute estimates. Still, with a host of effects, lenders are going all out to circumvent it, including tightening credit.

Lenders are going to pull back on credit and “make fewer loans that might go into forbearance,” said Bernadette Kogler, Chief Executive of RiskSpan, a mortgage analytics firm.

In July, reportedly, the New York legislature gave the nod to a bill making it incumbent upon lenders to notify the state’s Department of Financial Services and mortgagors of impending foreclosure actions against homeowners with reverse mortgages.

A new layer of DHS regulation to reverse mortgages issued under the Home Equity Conversion Mortgage programs sponsored by the Federal Housing Administration (FHA) and the Department of State Senate as S4408.

About Author: Chuck Green

Chuck Green has contributed to the Wall Street Journal, Washington Post, Los Angeles Times, San Francisco Chronicle, Chicago Tribune and others covering various industries, including real estate, business and banking, technology, and sports.

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