The U.S. loan servicing industry, easily overlooked during good economic times, is now facing its most challenging moment since the financial crisis of 2008 and 2009.
Seemingly overnight, the COVID-19 pandemic has upended staffing plans, sparked concerns about servicers’ capacity to handle the expected crush of missed payments, and even raised questions about the ability of many servicers to stay afloat.
Loan servicers are companies that collect payments from borrowers, often on behalf of lenders or other firms that own consumer loans. In the residential mortgage industry today, servicers are far less likely to be banks than they were during the last crisis, which may add to the instability of the present situation.
One immediate problem for loan servicers is how to staff their call centers at a time when government officials, in an effort to slow the spread of the virus, are either banning or strongly discouraging mass gatherings. President Trump said Monday that his administration is advising Americans not to congregate in groups of more than 10 people.
Given the health fears, servicers will not be able to operate call centers with 250 employees sitting three-and-a-half feet from each other, noted Ed Delgado, the CEO of Five Star Global, a trade group for mortgage servicers.
“Can they have every other cubicle occupied, so that you’re at least six feet apart from your co-worker?” Delgado asked.
Scott Buchanan, executive director of the Student Loan Servicing Alliance, said that several servicers have had to stagger their shifts in order to re-seat call-center workers, which has limited the firms’ capacity to take calls from customers.
He noted that servicers have emergency preparedness plans, but added: “I think this is a scale that probably very few companies have contemplated.”
The staffing challenges will likely get worse. Some call-center employees may get the virus, while others will be under quarantine because they live with a sick relative. Still others may live in regions where residents have been ordered to stay at home in almost all circumstances, as occurred Monday in San Francisco and six nearby counties.
“Then how do you handle the call volume coming in?” Delgado asked.
That question will become even more important when phone calls from cash-strapped borrowers spike, as industry officials and other observers expect it will in the coming weeks.
“There will be widespread dislocation and people who can’t make their mortgage,” predicted Kevin Kanouff, CEO of Statebridge Company, a Denver-based mortgage servicer.
Jesse Van Tol, the CEO of the National Community Reinvestment Coalition, gave a similar assessment. “This could be bad. And you could see cascading impacts that put a lot of borrowers in foreclosure,” he said.
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Bank of America is already seeing a flurry of activity from customers seeking debt relief, according to a spokesman. During a national TV appearance on Sunday, Chairman and CEO Brian Moynihan said that borrowers who are affected by the outbreak and cannot make their payments can call the Charlotte-based bank.
“We defer the payment. We’ve done it for every natural disaster. The whole industry does this,” Moynihan said on the CBS show “Face The Nation.”
For servicers of federal student loans, a new wrinkle emerged Friday when President Trump said that he would waive interest on those loans until further notice. Servicers are waiting for details from the Department of Education on how that policy change will be implemented.
Under the federal student loan program, borrowers who suffer economic hardship already have the option to defer payments. But the student loan servicing industry has long been dogged by critics who say that large servicing companies often fail to live up to their obligations.
“America cannot afford their shoddy servicing and bungled implementation of emergency debt relief programs,” Ben Kaufman, a research and policy analyst at the Student Borrower Protection Center, wrote in a blog post Friday.
Mortgage servicers are also bracing for government responses to the expected surge in missed home-loan payments. They are arguing that the scope of the government’s plan should be narrower than some proposals that have emerged in recent days.
At the Democratic presidential debate on Sunday, former Vice President Joe Biden called for swift and thorough action to prevent Americans from being kicked out of their homes. Those remarks were interpreted by industry officials as tantamount to a call for a nationwide foreclosure moratorium, an idea that was also floated during the last crisis but never implemented.
A nationwide moratorium plan would likely face strong opposition from the servicing industry, which collects revenue when homes go into foreclosure.
Another idea under discussion in Washington involves the establishment of standards for offers of forbearance, which allow impacted borrowers to delay their payments for a specified period of time.
Pete Mills, a senior vice president at the Mortgage Bankers Association, argues that borrowers should be required to contact their servicers in order to qualify for such relief, rather than having it granted automatically.
“You can’t have blanket national forbearance. That would create too much strain on the system,” he said.
Mills also contends that Fannie Mae, Freddie Mac and the various federal agencies that are involved in the mortgage industry should strive to standardize the forbearance options that loan servicers present to borrowers.
And he said that homeowners should not be required to submit a raft of paperwork in order to qualify for forbearance. A decade ago, the servicing industry came under fire for losing paperwork from borrowers seeking loan modifications.
“The more uniformity we have in the government programs, the easier it is for the industry,” Mills said.
In the meantime, the Federal Housing Finance Agency, which oversees Fannie and Freddie, has encouraged borrowers who may struggle to pay their mortgages due to the outbreak to contact their loan servicers about the current forbearance options.
The nationwide scale of the current crisis distinguishes it from previous situations in which large numbers of borrowers faced economic hardship. Following hurricanes and other natural disasters, servicers can pinpoint who is eligible for relief based on their geographic location.
“So it’s different,” Delgado said. “We simply don’t know the number of people that have been indirectly impacted.”
One important development since the 2008-2009 crisis is that mortgage servicers are now subject to detailed rules from the Consumer Financial Protection Bureau.
Richard Cordray, the bureau’s former director, said in a recent interview that those rules have helped borrowers stay in their homes. “They’re making a difference every day across the country,” he said.
But Cordray also argued that mortgage servicers continue to have an economic incentive to underinvest in their operations during good economic times, as they did in the run-up to the 2008-2009 crisis.
In the fourth quarter of 2019, only 3.5% of U.S. residential mortgages were at least 30 days delinquent, according to data from the Federal Reserve Bank of New York. That metric peaked at 12.4% in the third quarter of 2009.
“The loan servicers typically do not build their processes for those hard times,” Cordray said.
Christopher Odinet, a University of Oklahoma law professor who recently wrote a book about the mortgage servicing business, argues that the industry is actually worse equipped to deal with a sharp financial downturn than it was 12 years ago.
“I think the mortgage servicing system is weaker and more vulnerable to collapsing now,” Odinet said.
The principal reason, he added, is that banks have a substantially smaller presence in the mortgage servicing business than they did in 2008. A report last year by the Federal Deposit Insurance Corp. found that nonbanks serviced about 42% of mortgages in 2018, which was up from around 10% a decade earlier.
The same FDIC report found that the cost of servicing a nonperforming mortgage increased more than fivefold between 2008 and 2018.
The FDIC also concluded that nonbank loan servicers have important similarities to firms that faltered during the last crisis because of funding and liquidity strains.
“Given their similar funding structures, in an episode of pronounced housing-market stress, these nonbanks could exhibit vulnerabilities similar to those of their predecessors,” Kayla Shoemaker, a senior policy analyst at the FDIC, wrote in the 2019 report.
Odinet said that nonbank mortgage servicers generally fund their operations from fees they collect from borrowers and short-term liquidity from banks.
“So they are very, very sensitive to liquidity stress,” he said. “The way they fund their operations makes them very, very vulnerable to larger economic shocks.”
Industry executives insisted Monday that they are not currently experiencing funding stress, but the Mortgage Bankers Association acknowledged that concerns are emerging with respect to nonbank servicers.
“We are looking at ways to address some of the liquidity issues,” said Mills, the senior vice president at the Washington-based trade association.
He raised the possibility of a liquidity backstop for nonbank mortgage servicers but declined to provide specific ideas about how such a mechanism might work.
Kate Berry contributed to this report.
