Published by DSNews on August 11, 2o2o
It’s not too late for mortgage servicers to prepare for the next pandemic-driven event—a likely rise in loan modifications and loss mitigation requests.
Charles Dickens and Mark Twain may have been contemporaries, but they sure didn’t see eye to eye when it came to time management. Dickens is known for the line, “Procrastination is the thief of time,” while Twain’s view was, “Never put off till tomorrow what you can do the day after tomorrow.”
While funny, there’s more than a kernel of truth in what Twain says. Too often, in our industry and elsewhere, companies wait until the last minute to react to change—until it’s almost too late. Or it is too late.
Fortunately, it’s not too late for mortgage servicers to prepare for the next pandemic- driven event, namely a likely rise in loan modifications and loss mitigation requests when forbearance periods end. Whether they’re ready to follow the advice of Dickens or Twain remains to be seen. But there are definitely reasons to act now.
Not As Bad As 2008 … But Just Wait
Throughout our industry, comparisons are being made between today’s financial crisis and the Great Recession. There’s an eerie feeling as though we’re all watching a reboot of a movie we’ve seen before. But this version is quite different. For example, servicers are being tested by simultaneous spikes in volume both from forbearance requests and refinancing, which we’ve never seen before. These have historically been countercyclical.
The most significant difference, though, is the fact that no one saw the pandemic coming. The 2008 crisis was caused primarily by an unhealthy housing market, and it built up over time due to loans being made to people who couldn’t afford them and inflated property values. This time, the financial crisis isn’t being driven by economic factors, nor through any fault of consumers. In fact, property values overall are generally holding steady thus far, so there’s optimism that the current crisis won’t last nearly as long as the previous one.
There are other positives. Compared to 2008, the government’s response to the current crisis has been much better.
While millions of Americans have filed unemployment claims, many did not have to because of the Paycheck Protection Program (PPP), which enabled businesses to keep workers on their payrolls. Meanwhile, the FHFA’s forbearance plan to allow borrowers to skip payments and add them to the end of their loan terms has been a huge relief to homeowners who truly needed some financial breathing room. Luckily, we have been in an agency/government market since the last crisis so FHFA could respond impactfully.
While the FHFA’s decision brought stability and clarity to the unknown, however, it also means that an enormous number of loans will have to be modified when forbearance periods end. Since more than four million loans are currently in forbearance, we’re expecting an enormous spike in loan modifications. Even half of this number would be huge. Most servicers don’t have the means to underwrite many loan modifications. Nor are most servicers prepared for the wave of defaults that will likely follow from borrowers who will be unable to continue paying their mortgage because of permanent job loss.
Yet another difference between the two crises involves human resources. When loan originations ground to a near halt during the 2008 recession, many mortgage company employees were able to switch from origination roles to servicing roles. Today, on the other hand, there are fewer people to keep up with the demand for both refis and loss mitigation assistance, especially with the pandemic forcing businesses to move to remote workforces.
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