Mortgage servicing could face increased scrutiny early next year as the incoming Biden administration and some states are expected to take a harder line with lenders that fail to work with borrowers hurt by the pandemic.
In April, the first round of forbearance plans granted through the Coronavirus, Aid, Relief, and Economic Security Act will expire. The deadline to request new plans will come even sooner. But even though the percentage of mortgages in forbearance has tailed off since June, concerns are mounting that some borrowers will be unable to resume mortgage payments when their plans end.
"When forbearances start to come to an end, the government is going to press for ways for servicers not to foreclose,” said Jeff Naimon, a partner at the Buckley law firm, who represents servicers.
President-elect Joe Biden could influence servicing policy if he moves quickly to replace Consumer Financial Protection Bureau Director Kathy Kraninger, who is is widely expected either to
It is not yet known whom the Biden team will pick to succeed to Kraninger or exactly how the CFPB will compel servicers to help borrowers. But the transition has appointed well-known consumer advocates to its CFPB review team, including Leandra English, a former CFPB official in the Obama administration, and California financial services regulator Manny Alvarez.
Servicers that do not work with borrowers on loss mitigation strategies could face enforcement actions and fines under a new acting CFPB director who is likely to focus on aiding consumers during the pandemic, observers said. The administration's mortgage servicing policy could also be affected by steps Congress takes on a new stimulus plan.
“It’s no secret that the Biden administration has an overall focus on helping the consumer, that’s a known policy platform and there’s a question of how quickly that can be enacted,” said Matt Komos, vice president of research and consulting at the credit bureau TransUnion. “That’s the big question mark — what’s going to happen to the consumer and will there be more stimulus?”
The Biden administration also is expected to push for the Federal Housing Finance Agency and the Federal Housing Administration to further extend forbearances to aid struggling homeowners. Meanwhile, several states are expected to work closely with a new acting CFPB director in coordinating actions and monitoring servicers as they have since the 2008 financial crisis. States that have created their own "mini-CFPB" agencies — such as California, Pennsylvania and New Jersey — could be particularly focused on the pandemic's effects on homeowners.
Lower forbearance percentage could be mirage
Forbearance plans as a percentage of all mortgages were on a downward trend in the fall. Roughly 2.8 million homeowners were in forbearance plans as of Nov. 22, or 5.5% of all loans outstanding, according to the Mortgage Bankers Association. The figure ballooned above 8% in May but has steadily declined.
But skyrocketing numbers of COVID-19 cases following Thanksgiving and concerns about virus spread over the winter holidays have led to fears of more economic fallout.
“One looming concern is that many consumers will neither restart paying their loans nor participate in a loss mitigation dialogue with the servicer," said Naimon.
The CFPB has been scrutinizing servicers throughout the pandemic and state regulators have held regular briefings with servicers about the CARES Act requirements, sources said, including that borrowers'
A new acting CFPB director is likely to reverse immediately some of the actions taken by Kraninger, who gave servicers
A Biden-appointed CFPB chief could revise or reverse a joint policy statement that suspended enforcement and supervision of loss mitigation rules imposing requirements on servicers to work with borrowers seeking assistance. Kraninger promised not to issue public enforcement actions against servicers that make a "good-faith effort" to work with borrowers, but a new acting director is likely to change course.
“The Biden administration will exact whatever punishment they need to for any servicer who steps out of line,” said Rick Sharga, executive vice president at RealtyTrac, a property research portal owned by Attom Data Solutions in Irvine, Calif. “In the [Obama administration], the CFPB had a reputation for punishing companies whether the action was accidental or on purpose and they are dealing with a borrower’s place of residence and a mistake could cost somebody their home.”
Waters's recommendations
Consumer advocates are expected to have more of a voice at the CFPB under a Biden administration and will push for rigorous oversight and monitoring of servicers, particularly for borrowers who have deferred payments and face foreclosure.
Last week, House Financial Services Committee Chairwoman Maxine Waters, D-Calif., previewed steps that a Biden-appointed CFPB team could take. In a
For example, Waters recommended that the CFPB revise an interim rule from June that gave servicers regulatory relief from Regulation X regarding when a borrower submits an incomplete loss mitigation application. Waters noted that the CFPB needs to provide more rigorous foreclosure protections for consumers who sought deferrals of their mortgage payments.
Credit reporting and outreach to minority borrowers are two areas where servicers will likely face scrutiny, largely because delinquency rates continue to be higher for borrowers with lower credit scores and higher debt-to-income ratios. Their loans tend to be backed by the FHA, the Department of Veterans Affairs or the U.S. Department of Agriculture Rural Housing Service.
"Many servicers were not offering the CARES Act forbearance, whether out of ignorance or negligence, or the consumer didn't ask for it," said Maurice Jorgain-Earl, managing director of ComplianceTech, a software company that examines Home Mortgage Disclosure Act data. "The coronavirus is hitting Black communities harder than others and there needs to be more education and outreach."
End of forbearance plans will be crucial test
For those currently in forbearance, a critical test comes next year when the initial round of deferral plans under the CARES Act expires in April. At that point, potentially millions of borrowers will need loss mitigation at the same time. Without an additional stimulus package, more borrowers may be unable to continue making payments.
An immediate concern is that roughly 500,000 to 1 million borrowers are delinquent on their mortgage but have not asked for a forbearance, said Pete Mills, senior vice president of residential policy at the Mortgage Bankers Association.
The MBA has asked Fannie Mae, Freddie Mac and the FHA for clarity on the specific cutoff date for borrowers to request a forbearance on government-backed loans, which Mills estimates to be between late February and mid-March.
“There is still a question of how long the window is open for borrowers who have not taken forbearance,” Mills said.
In addition, many six-month forbearance plans are coming to an end or have already done so. In those cases, borrowers need to contact their servicers to get extensions, Mills said.
Last week, the FHFA extended a moratorium on single-family foreclosures until Jan. 31.
Most servicers are prepared to offer loss mitigation and partial deferrals of mortgage payments because of CFPB and state servicing requirements mandated after the financial crisis of 2007-2008.
“The one thing we’ve learned from the last crisis is that servicers now are very good at modifying mortgages,” said Karan Kaul, senior research associate at the Urban Institute’s Housing Finance Policy Center. “There is no way to predict what the [Biden] administration or Congress will do, but if nothing were to happen once a borrower exhausts their forbearance, they go through the modification route to get a temporary reduction in mortgage payments.”
Unlike in the last financial crisis, when home prices plummeted and many borrowers were underwater on their mortgages, this time around borrowers can refinance or sell their homes rather than go into foreclosure.
“One of the reasons I don’t foresee another tsunami of foreclosures is homeowners are sitting on $6.5 trillion of equity,” said Sharga at RealtyTrac. “If a homeowner does find themselves in financial distress, it’s a much better option to sell the property than to risk everything to foreclosure.”
Still, with the economy on shaky ground and the coronavirus raging, there remain plenty of unknowns.
"The results have not been as catastrophic for lenders and investors as many expected, but no one can tell what has been the cost in sacrifices at the household level or what the future holds," said Konrad Alt, a partner at Klaros Group, a San Francisco advisory firm, and former chief operating officer at Promontory Financial Group.
