Why servicers may need a loss mit standard that goes beyond HAMP
As a wave of distressed mortgages looms due to the spread of the coronavirus, a call for a loss mitigation standard has gone up again, but it’s different than after the Great Recession.
Some federal programs, such as the Home Affordable Modification Program, were set up during the financial crisis but the industry can’t simply go back to those, said Quyen Truong, partner at Stroock & Stroock & Lavan and former assistant director at the Consumer Financial Protection Bureau.
"It's too early to say what those standards and processes will look like, but we cannot just replicate the options used in the foreclosure crisis," she said. "That would not be effective in the current situation, given that past standards [like those under HAMP] were complex to implement. With more outsourcing today, servicing operations would be overwhelmed, especially with social distancing, travel and other restrictions related to the coronavirus limiting their resources."
To best address the current crisis, servicing standards would need to be highly standardized and efficient, and address the requirements of governmental entities, applicants and servicers.
"Ideally the government would be working with the industry to come up with streamlined processes that would be effective to implement quickly," Quyen said.
Those discussions would have to account for the fact that the increased concentration of servicing rights into nonbank third parties has changed the industry's needs. More than 40% of servicers were nonbanks in 2019 as compared to closer to 10% in 2009, according to the Mortgage Bankers Association.
"Over the last decade, banks have outsourced more and more functions to third-parties. Third-party servicers are responsible for a large portion of the mortgages in the U.S. today, in contrast to the period immediately following the financial crisis, when servicing was done primarily by the banks," said Quyen.
The change poses some challenges in the face the current crisis, but it also has an upside.
"That shift cuts both ways. On the negative side, the increase in servicing demands has a much more concentrated impact on these third parties. These are companies, some large and some small, which deal exclusively or primarily with loan servicing. They don't have the same staffing or economic cushion the banks have to deal with a dramatic increase in demand," said Quyen. "On the positive side, they are specialized and therefore have technology resources and capabilities focused on loan servicing. So if there is a good model, they can implement it reasonably effectively. But it would take a great deal of effort and cooperation to develop an effective model, and that effort is just starting up."
Distressed mortgage technology has come a long way since the last downturn and so has the standardization of modifications, noted Jane Mason, CEO of servicing technology provider Clarifire.
Prior to last financial crisis, modifications weren’t even a standard practice, so HAMP — as complicated as it was — did play a role in establishing the idea that there should be some uniformity in approach. Today, as a result, most government and government-sponsored enterprise programs are relatively standardized at least within individual entities.
Some groups, like the Community Home Lenders Association and others, are calling for one standard such as the Federal Housing Administration's to be applied across all entities, but Mason said even the entity-level standardization currently in place goes a long way toward helping vendors and mortgage companies process loss mitigation requests in the short run.
"We believe that the agencies have done a pretty good job of creating disaster forbearance standards," she said.
That said, if changes are made a policies or programs, systems can respond relatively quickly, Mason added. Currently it takes about 24 hours to implement a change using technology that halts activity, updates the system of record and removes loans out of queues until new procedures are in place.
What is most pressing for mortgage companies at the moment is to find efficiently process a flood of inbound refinancing and forbearance requests.
"The challenge is volume," said Mason.
Some are finding proactive emails that give users a click-through button to press for automated assistance with the service they need help as they struggle to find ways to allow call center staff used to working at central locations to work from home or otherwise practice social distancing.
Mason's company recently set a client up with technology that allows forbearance requests to be taken verbally as well as online. Those requests are then processed such that a letter that serves as an initial agreement can be generated within three minutes. Follow-up for processing the forbearance down the road is automated too, she said.
Standards are something more likely to come into play long term. Ones that might be helpful and have no precedent from the previous crisis are measures that establish how to document that a hardship is related to the virus, Mason said.
HAMP may not be the model to go back to for national standards, but it may still be a building block for ideas if the market reaches a point where it needs them, according to Allen Price, senior vice president at servicer BSI Financial Services.
"I don't think we’ll go back to HAMP, but if this is a protracted, widespread, long-term problem and with unemployment and wage cuts, then there is going to be a need for federal programs for housing. During the HAMP era we learned a lot. There are things you can leverage from that experience to help you create something else. If a program gets created due to COVID-19 we have a good baseline."
Although a more far-reaching standard may be needed in the future, the national moratorium on government-related foreclosures and evictions, current loss mitigation practices in government-related markets, and a degree of uniformity when it comes to loss mit in the private market should serve for now, he said.
"We want to do everything in our power to keep people in their homes. We're in communication with private investors and they have the same view. At the end of the day I think we’re all in the same general mindset," said Price.