The Consumer Financial Protection Bureau (CFPB) has been closely monitoring the loan default situation and is taking various steps in a bid to prevent a wave of foreclosures that could result from borrowers exiting their mortgage forbearance plans.
For many borrowers affected by the COVID-19 pandemic, the current deadline to exit their forbearance plan is June 30, 2021, after which the foreclosure moratoriums on federally backed mortgages could end. Experts believe there could be a surge of loan delinquencies once the moratoriums expire. Many borrowers who are currently in forbearance are at least 120 days behind on their payments, according to the CFPB.
As of April 4, 2021, about 2.3 million homeowners in the U.S. were enrolled in some type of forbearance program, according to data from the Mortgage Bankers Association. This past January, 3.8% of all mortgages were considered seriously delinquent, meaning they were at least 90 days past due or had already entered foreclosure, CoreLogic reported.
Under a CFPB proposal released in April, however, a servicer would not be allowed to immediately foreclose on a home once the forbearance period ends. The proposal, which would prevent foreclosures on all federally backed and privately held mortgages until 2022, would require servicers to institute a special preforeclosure review period in which some borrowers experiencing pandemic-related hardships would be offered loan modification options.
No matter how or when they occur, foreclosures can be detrimental to homeowners and lenders. They lower property values in surrounding neighborhoods, and they prove to be expensive for servicers and investors alike. It is best to try different ways and means to prevent them whenever possible. It is important for mortgage originators to understand what is happening on the servicing side of the business as they may be needed to answer borrower questions about the loan modification process. In helping these clients successfully navigate the process and keep their homes, originators can improve their chances of retaining future business opportunities.
Loan modification tends to be a win-win situation for borrowers and servicers. For some time, however, accounting for loan modifications has been a challenge for financial institutions.
Servicers often struggle with the workload involved in successfully completing a loan modification. A shortage of resources and a lack of standardized business processes are tough to manage for many servicers. The pandemic and ensuing guidelines under the Coronavirus Aid, Relief and Economic Security Act have magnified these problems.
In general, loan modification is a process in which speed, accuracy and efficiency are essential factors that impact the servicer’s standing against marketplace competitors. Servicers need to develop a significant plan of action that focuses on easing the process.
Scale for speed
Once the volume of loan modification requests starts to rise, servicers may not have the leeway to quickly swing into action and increase their scale of business, per the changing requirements. Therefore, it’s critical for them to make decisions related to the speed of response at the right time.
While scaling their loan modification teams, servicers may look within their own companies for the proper skills. Partnering with an external organization to quickly ramp up capacity, however, is the more popular option. Forming a partnership with the right external party can help immensely. When it is time to scale down, servicers will not continue incurring the additional fixed costs.
Servicers also have to be aware of pervasive digital technology that has given rise to well-informed consumers. The extensive adoption of user-friendly technology can greatly increase business productivity. Now is the time for servicers to invest in tech solutions that are likely to drive long-term efficiencies through borrower self-service and automation. Tools such as artificial intelligence (AI), robotic process automation and intelligent chatbots are needed at this hour to resolve borrower demands more quickly, effectively and free from human intervention.
Considering the likelihood that the volume of loan modification requests will be high, harnessing the power of omnichannel analytics and AI may provide a host of advantages. This includes the delivery of a superior borrower experience, accurate decisions and a reduction of paper documents. There are third-party partners that can help servicers increase their bandwidth through additional tech resources, which can be seamlessly integrated with existing systems.
Even with a good employee infrastructure and the proper technology, it is possible that larger servicing volumes may result in more documentation and rigid compliance standards. Servicers must ensure that quality loan files are sent to underwriters.
Effective engagement and communication with borrowers is necessary for the process to remain smooth. Third-party partners are often able to review loan files before passing them on to underwriters, which can help identify anomalies early on.
Most importantly, servicers must have access to the right domain-sensitive skills. This comes in the form of teams with knowledge specific to the mortgage industry. Robust experience in real estate finance, as well as mastery of the tools and technologies to meet heavier loan modification volumes, matters a lot in times like these. From the moment they choose to scale up, and during any training-requirement period, servicers will benefit significantly from skilled resources tailored for the mortgage domain.
Even as the CFPB takes steps to stave off a potential pandemic-induced foreclosure surge, it remains to be seen how this will eventually pan out. What is clear, however, is that servicers will have to be prepared with a solid plan of action for the loan modification solutions they make available to borrowers. In turn, mortgage originators should understand how these solutions are being implemented so that they can discuss options with their clients. ●