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Servicers Adapt to Changing Times

This piece originally appeared in the September 2022 edition of DS News magazine, online now [1].

Mortgage servicers’ ability to help customers impacted by life events and economic factors has consistently improved since 2009 when the U.S. Treasury first released the Home Affordable Modification Program (HAMP). Since that time, the mortgage servicing industry has built on the success of HAMP by enhancing programs to help struggling homeowners avoid foreclosure. Some of these enhancements included streamlined modifications and greater consistency across investors/guarantors. Also, programs for assisting customers impacted by natural disasters (like Hurricanes Harvey and Irma) were further enhanced to provide immediate payment relief in a scalable way.

Lessons From the COVID-19 Coronavirus Pandemic
As the world began to experience the effects of the COVID-19 pandemic, mortgage servicers faced a new challenge: simultaneously creating and executing new programs while managing the impacts COVID-19 had on their own operations and workforce. The country experienced a precipitous rise in unemployment, 3.5% in January 2020 to 14.7% April 20201, resulting in the need to provide payment relief to approximately 3,800,0002 customers within the initial two months of the COVID-19 pandemic (March and April of 2020). The forbearance program that ultimately offered relief up to 18 months and provided delinquency resolution by adding missed payments to the end of the loan term was an effective solution and illustrated several key loss mitigation design principles:

Making Enhancements Permanent
The following important enhancements were instrumental in the success of COVID-19 relief programs:

A New Set of Challenges
There are three options available to lower a customer’s payments through modification:

The first two options are constrained in the current environment as a result of increasing rates and elevated levels of housing appreciation.

Interest rates have risen significantly in 2022, with the Freddie Mac Primary Mortgage Market Survey (PMMS)’s 30- year, fixed-rate mortgage rising from 3.22% on January 6, to 5.54% on July 21. Freddie Mac’s PMMS is the basis for most industry modification programs.

In many programs, the amount of relief available to customers through a modification that reduces the interest-bearing principal is tied to the LTV ratio. As housing values appreciate, LTV ratios decrease, thus limiting a mortgage servicer’s ability to provide principal reduction.

As a result, the industry must now consider new types of programs to provide needed payment relief to customers who have equity (~20%) in their homes, and whose mortgages are at a rate lower than current market rates.

Industry stakeholders may consider one or more among the following options: