Conversations around the federal block on evictions have shifted. In 2020, they revolved around customer care and borrowers’ rights, sensitivity and options, regulatory updates, protections, adjustments, administration impacts, and extensions. In 2021, everyone is talking about industry predictions.
Questions regarding when volume will return within the default space, where numbers will be highest or lowest, or how to adequately prepare have permeated the last 8-10 months of debate. Most disagree on any specifics, finding themselves existing close to each other on a “predictive continuum” but seldom overlapping. Still, there is a consensus on one aspect: “We can’t predict the future of the industry.”
But why don’t we know? Why are better predictive analytics not available for investors, servicers, and field service providers to help hazard an educated guess?
Gazing Through the Crystal Ball
Credible sources in each of these groups agree that it is impossible to forecast the volumes. Some experts are looking at high volumes in cities, others more multifamily investment properties. Regarding inventory levels, opinions are split over these not coming close to pre-pandemic numbers and the belief that a push for short sale may be sagacious. Many believe that properties may be in a better condition, but others estimate that homes will be found in a much worse condition than standard default inventory. The reasons that feed into this last case are a vast and varied collection of variables that boil down to not having the data available to make any ripe estimations.
Although the magnitude of a catastrophic event like the COVID-19 pandemic can be viewed as a “never-before” phenomenon to help draw predictions into tighter focus, the experience during the 2008-2011 housing crisis should have industry leaders more homed in on trends. For example, forbearance was the least utilized type of customer option before the pandemic and now it dominates loan modification. How do we get eyes on these assets now and help ourselves respond appropriately?
A Need for Inspections
Under the temporary suspension order, property inspections for loans with a CARES Act forbearance are not required if the loan is current or had not reached the 60th day of delinquency when the borrower requested a forbearance. Still, inspections are required for vacant or abandoned properties. Assuming that borrowers in forbearance are truly occupying the home carries an incredible risk particularly for servicers. Knowing a home is vacant allows servicers to proceed with a fitting response regardless of the moratorium.
These assets have not reached delinquency keeping servicers from issuing non-claimable inspections. Non-claimable inspections are necessary and servicer actions cannot be rationalized solely by claimability and bottom line.
Investor/insurer guidelines have minimum inspection requirements (for example inspect every 20-35 days on or after the 60th day of delinquency) but they do not prohibit servicers from doing more. Most servicer guides indicate that inspections should occur as often as necessary to “protect [their] interests”; with inspections taking place on a property immediately once deemed vacant or abandoned.
If a servicer fails to determine an accurate occupancy status at first-time vacancy (FTV), much of the work may not be claimable since it could be deemed as mortgagee neglect or servicing error or could result in demand for reimbursement. All these outcomes can be costly to the servicer, making it imperative to know the true FTV to reduce their exposure.
One servicer reported approximately 12% of borrowers in their forbearance portfolio were not delinquent before COVID-19 and have not missed a payment throughout the pandemic. Servicers may not want to go out of their way for an inspection of these low-risk and performing loans.
On the other hand, consider a nonperforming loan, a loan for an asset in a higher-risk market or in a judicial state, one or two months into forbearance. Would it be prudent to review analysis on these loans? Consider this, if the cost of a drive-by inspection during those initial months would reduce servicers’ exposure and risk of potentially missing true FTV, it would reasonably give them a leg-up on necessary preservation and repair efforts. If the home is found occupied and maintained, an analysis of the loan might lead to the servicer never inspecting again or scheduling bimonthly inspections going forward. It would cost servicers (in most cases) approximately $15 to know that their asset is protected.
Now consider that the asset was found vacant or abandoned during a forbearance (drive-by) inspection. That same $15 drive-by could have saved the servicer thousands of dollars in repairs for existing damages, or those that would have resulted from the abandonment of the home. At minimum, this would allow the servicer to have FTV posted thereby avoiding costly mortgagee neglect and reduce the risk of reconveyance or demand for reimbursement.
There is general consensus to go that extra mile with nearly all industry leaders reporting that servicers should strengthen FTV to protect their interests despite the upfront, out-of-pocket costs of inspecting occupied homes. This begs the question: why haven’t they? Is it simply because they do not want to challenge the status quo?
One thing is certain, we’ve now seen two peaks in forbearance for two very different reasons in the last 15 years, so maybe we are due for some serious risk analysis in this space, along with conversations on the language we choose to use.
At minimum, $15 per property would lead us to ensure that appropriate investigations are capturing true data that can be quantified and employed to develop future predictions in the market, in servicing standards, for our borrowers, and in our communities.