Servicers Adapt to Changing Times

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

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:

• Consistency: Investor/insurer coordination is the key driver of success and confidence for both servicers and homeowners. Greater investor/insurer alignment of program offering helped deliver programs at scale with clear messaging to customers.
• Efficiency, Simplicity, and Scalability: Simplicity of program design and reduced technical requirements, such as elimination of signed agreements and submission of proof of hardship, allowed relief to be delivered at scale. It also enabled servicers to rapidly offer assistance through multiple channels, including digital, voice recognition, and live agents.
• Clarity: Customers in financial distress look for certainty that there will be a path to getting back on their feet. Providing a deferment option at the end of the forbearance period gave customers an exit path that avoided future hardship caused by a required lump sum payment.

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

• GSE rate reductions for customers whose loan-to-value (LTV) was less than 80%.
• Streamlined modifications for FHA customers.
• FHA development of a 40-year modification program supported by Ginnie Mae liquidity.
• FHA temporary waiver of outdated face-to-face meeting requirements.

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

• Lowering a customer’s interest rate
• Reducing the interest-bearing unpaid principal (through principal forbearance)
• Extending the amortization period

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:

• Allowing a portion of the principal balance to be included in partial claims/MRAs while re-amortizing the remaining interest-bearing balance and maintaining the customer’s current rates. This solution requires GNMA to permit recast within their securities.
• Re-amortizing the mortgage for a period beyond 40 years.
• Providing interest-only options (and no negative amortization) for customers who have a strong equity position, which maintains the ability for customers to remain in their homes with an affordable payment, sell their homes at a time of their choosing, and participate in future equity appreciation.
• Reintroducing a step-rate modification feature where the initial rate is lower than the market rate and increases to the market rate over the life of the loan. The HAMP program fixed the initial rate for five years, then step up annually by a maximum of 1% until the market rate was reached.
• Establishing a permanent VA Partial Claim program that aligns with the processing requirements that FHA and USDA have established and avoids the burdensome complexity of VA’s COVID-19-only Partial Claim.