How lenders are preparing for a wave of loan modifications
For the first weeks of the coronavirus crisis, mortgage servicers were in triage mode. As the government issued a flurry of measures to deal with financial hardships resulting from widespread economic shutdown, servicers rushed to grant the CARES Act mandated forbearances for GSE conforming loans.
But as the growth rate in forbearances has slowed, lenders are gaming out their plans for the moment when the 12-month forbearance period ends, puzzling over how to prepare themselves for what may come next.
"How many people are ultimately going to request forbearance and how quickly will the economy recover?" said Peter Carroll, executive of public policy and industry relations at CoreLogic. "And based on that how many homeowners will the industry be having to assist?"
While the government has in recent weeks issued additional guidance, allowing borrowers to tack missed payments onto the end of Fannie and Freddie loans for example, many loans will still need to be modified. But the extraordinary amount of unknowns to do with the question of when and how widespread economic recovery could happen make it difficult to design proactive measures to get ahead of the problem.
"Servicers are reacting with incredible speed to address this crisis," said Laurence Platt, a mortgage industry attorney with Mayer Brown. "But they're just a service provider, they can’t make it up as they go along. They have to get directions from the owners or the insurers of the loan. And the owners or the insurers of the loan are evolving their standards trying to address the crisis."
Offering a consumer a modification at this point in time might be a waste of energy, for example, since investor and regulatory guidelines regarding these forbearances are in a state of flux.
What the requirements are now regarding the end of forbearance period may be different from what they might be when the borrower actually exits; those rules have been updated several times already. "So a premature modification doesn’t make any sense, you've got to wait and see where the borrower is at the time," said Platt.
Automated problem solving
Even if or when the time comes to modify a large volume of loans, it won't be as simple as throwing more people at the problem. If servicers are thinking of deploying their traditional response to dealing with the extra work, by hiring 300-400 full-time employees to answer the influx of phone calls, "that’s not going to fix it," said Carissa Robb, the president and chief operating officer of Constant, a fintech that created the technology to manage its own distressed loans.
"I think we need to be a little bit more methodical about how we connect the relief options to the specific hardship," said Robb.
Unlike a loss mitigation situation in ordinary circumstances, mortgage servicers will need to apply more precision in understanding the severity of the borrower's hardship, the duration of the hardship and "most importantly, the ability to recover from that hardship," she said.
Constant originally created its artificial intelligence technology for its own lending programs, as a self-service tool to triage troubled borrowers and determine the proper path. But during the COVID-19 pandemic, Constant's management decided to offer the technology to other loan servicers. The data from the program gives users "a current picture on the ability of that borrower to start repaying and recover," Robb said.
"I think we're a bit behind as an industry in having a playbook that can analyze that," she added. "So it's time to come up with solutions that are in the best interests of the lenders and the servicers, but certainly the borrowers at the forefront."
Paradatec, which uses optical character recognition technology to pull information out of loan files, is also looking to address the need to throw bodies at a time-consuming task of setting consumers up for the post-forbearance period.
"Our position would be: take the time now, review your systems, review your processes with an eye toward automation like ours that can come in and augment your staff and have them be more efficient in that overall process," said Paul Fischer, director, professional services for Paradatec.
Its technology has loan modification agreement documents ready to go for those likely needing that loss mitigation path at the end of forbearance. It can also assess whether the borrower would go down that path in the first place.
"That picture is painted with a couple of different brushes," said Fischer. "Obviously you've got the loan file archive of what was agreed to at the time this loan was originated. But then you’ve got much more current content from the servicing system such as what’s the recent payment history from the borrower, have they been consistent in the last 12 months?"
Fischer noted examples of clients who, during the Great Recession, had a lot of employees working overtime and weekend work to handle the forbearance requests. With the Paradatec system installed, "the forbearance letters are coming, they’re being routed correctly, they're being processed with a high degree of automation and they’re being responsive to their borrowers without having to incur all that overtime," Fischer said.
"Now the next step is, when they get beyond the forbearance window, what can we help you with next? And make that default portion of the process as efficient and positive as this last experience was," Fischer said.
Key to handling the wave of servicing to come will be effective communication about a borrower’s options. "There is an opportunity to be more proactive, to say, 'Here’s your situation. Do you need this, is it right for you?' or what are the other options," said Craig Martin, managing director of the wealth and lending group at J.D. Power, which does annual customer service surveys of servicers.
"It's not easy, it’s the complexity of the portfolios, it's the complexity of the borrower," Marti said. Successful servicers will be "proactive in identifying the priority customers who likely are going to need a mod or some other alternative."
J.D. Power found in an April 17-19 survey that consumers had a mixed reaction to the payment deferral process for a mortgage, credit card or other loan. Of the 47% of respondents that have or expect to need a postponement or deferral for their loan, 7% submitted a request online and said the process was easy, but 5% went that route and said it wasn't easy. Similarly, 7% spoke to a representative that was helpful in their view, but 5% said that a live person was not of help.
But in what might be a telling statistic of the job lenders must take on to educate their borrowers, 5% said they needed to postpone payments now but didn’t know they could do this.
For those that have gotten the information about payment deferrals, lenders are not the primary source of information. Search sites like Google were cited by 41% as one of their sources of information versus calling their bank or lender for 37%, an April 10-12 J.D. Power survey found. Visiting the bank or lender's website was cited by 28% of consumers, who could choose more than one option.
The Great Recession’s many lessons
From a preparedness standpoint, mortgage servicers are in a much better position than they were after the Great Recession. That financial crisis lead to the creation of standards on how to handle loss mitigation procedures, Carroll at CoreLogic said.
"The positive things that came out of that experience are much better standardization around how to handle the loss mitigation process," said Carroll. "Given the importance of the GSEs, FHA, VA and Rural Housing to the market, they have established the standard policies and procedures that have provided a lot of benefit to the industry."
For PHH Mortgage, the servicing subsidiary of Ocwen Financial, the playbook for dealing with distressed companies comes out of its experience both after the Great Recession and during the widespread natural disasters of 2017 and 2018, said Scott Anderson, executive vice president and chief servicing officer. (Ocwen acquired PHH in October 2018.)
"The Great Recession allowed Ocwen and some others to get good at it; I think we got extremely good at it," Anderson said. "We implemented several new approaches to optimize how we fulfilled all the various tasks associated with the loss mitigation effort back then. But also we adopted some improved protocols and technology to assist with our communications."
PHH uses scripting, a prewritten guide used by personnel during a call, which, besides easing staffing demands, allows the company to make sure that what they're telling the customer is indeed accurate and consistent.
"So when the customer calls right now and when they call back an hour from now and get a different agent, they should get the exact same message. Maybe not the exact same words, but the exact same message," Anderson explained.
Scripting helps PHH properly set borrower expectations in terms of what will happen and when it will occur. The company uses an appointment call-back model, in which a meeting is set up on the borrower’s schedule with their single point of contact who is handling the case.
"We use the analogy of a doctor's office visit versus an emergency room visit," Anderson said. "In an emergency room, you don't have anything prepared, you're just showing up. When you go to the doctor’s appointment, there's a time set, you bring your X-rays, you bring any other information you might need."
From the back end, making the process smooth and seamless as possible for the borrower improved PHH's ability to serve them, said Jay Williams, senior vice president, servicing operations.
"When the borrower gets in trouble, they are nervous," Williams said. "They want help" but "they don't know what they're supposed to do; they don't know how they’re supposed to ask for it. Our ability to answer their questions quickly, to process their modifications quickly for those that needed modifications, became very, very important to put them at ease as quickly as possible."
PHH was able to use many of those techniques during the natural disaster wave of 2017 and 2018, Anderson said.
"That was very helpful in this instance, in our response to the pandemic because we had that ready to go," he said. "We have all fixings, we had all the processes, we had the experienced people that have been through those on the servicing side to be ready to go really at a moment's notice and respond appropriately to the impacted borrowers."
The plan for non-QM loans
If the government and conforming loan playbook has been set, the situation is a little more fluid for private-label, non-qualified mortgage loans. Those loans aren't covered by the CARES Act, nor the loss mitigation waterfall established for those other loan types.
But the method of handling forborne non-QM loans isn’t a mystery. "A lot of the servicers, particularly the ones that had some experience in servicing in 2008 or later, have backgrounds with how everything set up," said Vadim Verkhoglyad of dv01, a data management and analytics provider. Some non-QM loan servicers have already started the modification process for these loans, which Verkhoglyad called "a pretty positive sign."
"The fact that we already have programs up and running versus what happened during the crisis is already a pretty positive thing," he added, pointing to the two-year lag between when massive amounts of borrower defaults started happening and the creation of the Home Affordable Modification Program by the government. HAMP expired at the end of 2016, but successor programs were put in place.
Another change is the quality of nonconforming loans over the past decade. Loan products such as no income, no asset verification and low-documentation mortgages were poorly underwritten during the boom era. Changes in federal law made it impossible for these to be originated in the past decade.
The most recent data report from dv01 covered March, and it showed that total impaired payments for non-QM loans increased by 1.1% during the month to a total of 2.6%. That was well below the 6% unemployment rate.
In the past crisis, delinquencies on private-label mortgages grew faster than the unemployment rate, according to the report, which Verkhoglyad co-wrote. As a result, dv01 viewed March’s performance metrics during the initial phases of the pandemic as a testament to the strength of the underwriting present in non-QM loans.
"Some of the biggest servicers we see in non-QM are also QM servicers," Verkhoglyad said. "So a lot of servicing efforts are shared among both." Thus they apply the same logic and processes to their non-QM book used for the QM book.
That includes PHH, where out of 114,600 forbearance plans as of April 30, 79,200 involved private-label servicing (of that total, 63,200 loans were being serviced for New Residential), a regulatory filing said.
In working with those borrowers, "we've got more latitude, but in essence we follow a very similar type of model and we actually rolled that out long in advance or before the GSEs and FHA rolled out their deferral program," Anderson said.
The program offers up to three months of forbearance protection, handled on a month-by-month basis. Every month PHH would reset the forborne borrower's condition. If they missed a payment, it would be moved to the end of the loan, "so in essence every month they have a fresh start, they're now contractually current again," Anderson said. "And we would do that for up to three months." And that could be extended for another three months if needed.
"When it comes to the difference in the program, the end result, if we step ahead a year from where we are today and look at the end result, it would be very similar," said Williams.
No matter what the loan types serviced, borrower circumstances, no servicer is coming out of this unscathed, "that is very clear," Martin of J.D. Power said. "But who's going to put themselves in position to improve and be better off in the long term, will be those who are proactive in identifying and quickly calling" their customers.