Editor’s note: This feature originally appeared in the April issue of DS News
COVID-19 is much more than a health crisis. The virus has placed a stranglehold on the economy, employment, and the housing market.
Agencies such as the Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD) have enacted mortgage forbearance programs, allowing homeowners impacted by the virus the ability to either not make payments, or to make reduced payments for up to a year.
As with virtually every American industry, mortgage servicing is also feeling the pressure brought on by the pandemic, from staffing concerns and shifts to remote working, to a liquidity crunch as homeowners go into forbearance but servicers remain obligated to pay investors for the mortgage-backed securities created from the bundled loans. Across the board, servicers are facing increased workloads, making loss-mitigation more crucial than ever.
One possible source of relief? Financial services law firms. These firms, themselves struggling with lost business loads as foreclosures grind and courts close across the country, are now working to assist servicers with the ever-increasing volume of loss mitigation calls.
Pivoting to Help
Financial services law firms are uniquely positioned to assist servicers with loss mitigation needs, according to Caren Castle, Senior Attorney at the Wolf Firm, as their staff is already trained to communicate and reach out to borrowers in distress.
“We do that everyday, and have done that for the last 30-plus years,” she said. “Our employees are highly skilled in dealing with all facets of loss mitigation and we regularly, over the last umpteen years and through the last financial crisis, have handled and continue to handle various loss mitigation requests in various ways.”
Castle added that technology has aided these efforts, as they are able to transfer calls to clients and even handle them directly.
Mike Sullivan, the Director of Marketing and Client Relations for Codilis and Associates PC, said his firm considers themselves a loss mitigation firm as much as a foreclosure firm. Sullivan said the most important question to ask is, “What does the borrower want?”
Both Sullivan and Castle agree that law firms are used to dealing with the volume of calls that are expected, which Sullivan said is a “compliance-sensitive mission.”
“Many firms have borrower assistance teams or loss mitigation teams—people that deal in reinstatements, payoffs, and other borrower inquiries. Those people are easily transformed into loss mitigation assistance communicators,” Castle said.
Castle added that many law firms lived through the Great Recession more than a decade ago, and there are many lessons they learned from that, one of which being the amount of loss mitigation work that was involved.
“Because of the sheer volume of law firms involved in the past, they’ve done the training, understand the process, understand how to communicate and reach out and put in the technology in place to be able to help our clients now that we are facing that situation again,” she said.
Sullivan added that financial services law firms work with both mortgage documents and loss mitigation documents on a regular basis, so they are more than familiar with the lay of the land..
“It's not even a leap at all, really, for us to provide that kind of service to the industry. On top of that, when you talk about the attorneys in their individual states, they're licensed within those states,” Sullivan continued. “They have an ethical duty, in terms of the compliance and making sure that they're treating both our clients and their customers fairly. It's a natural fit for these firms to be able to help.”
While used to the paperwork and processes involved in loss mitigation work, Sullivan said the volume of work could be a concern for some law firms.
“The individual law firms already handle a lot of work and are used to fluctuations in the amount of work that they do. That volume aspect of it comes down to, ‘How can we fit in and help?’ It's going to be a significant amount of work that needs to be done. From a capacity perspective, however, the law firms have a lot of capacity to help,” Sullivan said.
Sullivan added that communication with servicers and their customers will also be one of the biggest challenges facing law firms, explaining that in the “first wave” there will be significant outreach from borrowers and mortgage servicers impacted by COVID-19.
“In-bound calls and communications will require immediate response, leaving borrowers who don’t reach out typically underserved. At the same time, our clients will be challenged to provide staffing. In many cases, their offices will be closed or have limited staffing,” he said.
Castle echoed Sullivan, saying it is important not to duplicate efforts and to set up appropriate lines of communication.
Another challenge noted by Castle is how the “complete moratorium” on much of the work these law firms do will impact them, suggesting that many firms have already shifted into “survival mode.”
“We need to make sure that staff is available at the law firm side and that there is a way for the law firm to be able to continue to pay for those staff when the normal course of business has basically come to a complete standstill,” Castle said. “Servicers are overwhelmed, and we're here to help, but we need to move quickly—and that's not an easy thing to do.”
Sullivan added that the moratorium on foreclosures will “hit every area of our industry” and suggested that something needed to be done to alleviate these concerns.
“You can stop the foreclosure, but you can’t stop the clock from ticking regarding interest accruals or the payment of real estate taxes and insurance,” Sullivan said. “In considering loss mitigation alternatives, at some point all of this needs to reconcile into a resolution that makes sense. Simply suspending payments and picking up after the moratorium ends raises questions about escrow analysis for instance. You don’t want to just pick up payments and have borrowers get a doubling of their escrow portion after the forbearance period.”
Flattening the Curve
Sullivan said that loss mitigation efforts are currently underway, and there are task forces working with the GSEs, HUD, and other agencies to ensure borrowers are supported.
“The industry will be hampered by the virus long after the moratorium ends. Loss mitigation will continue, bankruptcies will grow, foreclosure referrals will likely increase,” he said. “Similarly to buying time to ‘flatten the curve’ of the pandemic, our industry will be buying time to ‘flatten the curve’ of the coming foreclosure crisis. By engaging experienced default servicing law firms we will also be buying time to ‘flatten the curve’ of the rapidly coming liquidity crises for the attorneys.”
Castle said the length of the impact will vary throughout the country.
“I believe our industry will be much slower to recover some sense of normalcy than many others,” Castle said. “I believe we are looking at least a year to 18 months.”
She added that there may be a need for repayment plans or modifications to allow those missed payments to be paid over time or tacked onto the end of the loan.
However, Castle noted that the future remains uncertain, and a possible second round of COVID-19 infections could increase the recovery times across the nation.
She noted that it could take the legal industry more than a year to recover from the impact of the coronavirus and understand “what the new normal is.”
“I am certainly concerned over the survival of both servicers and the law firms, and we need to work together to serve the needs of the borrower,” she said. “Hopefully, we all end up on the other side of this—if not intact, ready to rebuild.”