Improved performance from temporary pandemic-era foreclosure prevention innovations has prompted new long-term servicing policies that could provide some benefits to the mortgage market, but experts at a recent Urban Institute event said more could be done to build on this.
Further efficiencies to assist service providers were also proposed.
David Seeler, president of Freedom's residential services division and vice president of correspondent lending, said mortgage lenders are still looking for more ways to avoid delays in processing distressed mortgages, which continue to impact costs.
“It goes largely unnoticed by the public, but it's the servicer who actually pays when a customer defaults on a payment,” he said.
One way to address these concerns is to get your loan back into repayable status as quickly as possible.
Moderator Michael Neal, a senior fellow at the Institute, raised the question of whether mortgage reserve accounts could complement existing programs in a constructive way and improve borrower outcomes.
“We're certainly big supporters of the concept of a reserve account or a financial vehicle that borrowers can tap into if they experience hardship, such as a drop in income or new, unexpected expenses,” said Meg Burns, executive vice president of the Housing Policy Council.
But crafting MRA rules can be complicated, she added.
“The challenge with this is administrative: how do you set it up? What will the funding come from? Who will manage it and under what circumstances will the funding be available?” Burns asked.
One alternative would be to explore whether the Federal Housing Administration's insurance fund could be used at the end of the grace period.
“Maybe there's a way to do it without creating a subordinate lien? Maybe there's a way to somehow set aside funds to repay the FHA when the loan is paid off,” she said.
However, avoiding these management challenges may be easier said than done, as there are limitations and nuances to how much standardization is possible, or how effective and efficient it can be.
While some entities, such as government-sponsored corporations, could grant deferred payments without recording such liens, some could not do so without Congressional intervention.
“While the outcomes from the various programs offered by lending institutions are generally the same for borrowers, the programs themselves are not the same, which creates inefficiencies and costs for servicers,” Burns said.
While research to date has shown that forbearances and deferrals have a good track record, there is debate about whether it is efficient to always offer them at the outset, especially when it is clear early on that a borrower is in long-term difficulty and likely to need a change.
That's one of the reasons the decision was made to continue requiring contact with borrowers, rather than an “automatic” forbearance as was considered early in the pandemic.
But consumer and civil rights groups at the event wanted a more aggressive effort to stop foreclosures, which not only hurt lending performance in ways that are costly to servicers but also challenge efforts to reduce racial disparities in homeownership.
“Our families are still struggling with the effects of the economic shock from the pandemic,” said Michael Collins, vice president of housing and financial capacity at the National Urban League.
“As an institution, we cannot foster generational wealth through our work unless we enable the more than 20,000 clients we serve each year to not only acquire, but also preserve and ultimately benefit from the assets that are the single greatest drivers of household wealth,” he added.
While some loans are currently performing well, there are other market conditions that are complicating borrowers' ability to recover from foreclosure, said Steve Sharp, senior counsel at the National Consumer Law Center.
“Consumers are benefiting from historically low interest rates but often lose that benefit through foreclosure. They are also facing the possibility of homelessness through foreclosure as the rental market has collapsed in many areas,” Sharp said.
Panelists also explored how lessons learned from the pandemic experience could bring more consumers access to sustainable homeownership.
The lessons for underwriting?
Lori Goodman, a research fellow at the Urban Institute's Housing Finance Policy Center, told attendees that improved performance due to pandemic forbearances and deferrals could theoretically justify more widespread underwriting, reiterating the results of an April study she co-authored.
“The 46% reduction in the rate of transitions from serious delinquencies to liquidation is significant and gives us the opportunity to expand the front end of the credit facility,” she said.
The study, funded by the Robert Wood Johnson Foundation, analyzed Fannie Mae data to examine how forbearance and deferrals have affected seriously delinquent single-family home borrowers and to consider related potential credit expansion.
The report compares performance during the pandemic to an average of 23% going from severe delinquency to foreclosure or liquidation in 2016. As of the second quarter of 2023, the average for loans without forbearance in 2020, early in the pandemic, was 15%, and the average for loans with forbearance was 3%.
Loans defined as liquidated or in foreclosure include those that are at least six months past due. Mortgages that are prepaid, currently paying, or less than six months past due are excluded from the foreclosure/liquidation category.
To roughly estimate what could be done within one subset of loans, the report applied the potential savings from performance improvements to credit scores below 700 and loan-to-value ratios (LTVs) above 90 percent, concluding that an additional 300,000 or more loans could be justified.
The study acknowledges that actually modifying underwriting terms based on performance will likely require further research.
If government-related loan buyers like Fannie Mae or its rival Freddie Mac wanted to consider such a change, they would have to consider the costs of forbearance or deferral, for example, for which a “rough” estimate was 24% of the savings.
“It doesn't expand the front end of the credit box by 46%, but it does suggest there's plenty of room to expand,” Goodman said.