COVID-19: Loss Mitigation Solutions
The current global pandemic has had an immediate economic impact, with some experts predicting record unemployment. The recent passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as well as a number of additional programs and guidance introduced by states and other local governments, is an attempt to blunt the economic downturn.
However, as more borrowers begin to experience financial hardships and default on their mortgages, servicers will be called on to provide additional relief outside the forbearances provided for in the current legislation, in the form of other loss mitigation options.
Current Economic Conditions
- Record numbers of people have filed for unemployment since the beginning of the COVID-19 pandemic, with many experts predicting Great Depression rates of unemployment
- The number of loans in forbearance rose from 0.25 percent of all loans at the beginning of March to over 7.5 percent by the end of April1. The volume of loans in forbearance could potentially reach 16 percent of all first-lien mortgages, and up to 30 percent of homeowners may default on their loans2
- Some estimates forecast up to $950 billion in delinquent mortgage debt in 2020 alone3
Passage of CARES Act
Multiple venues for consumer relief for federally backed mortgage loans, including:
- Foreclosure moratorium for 60 days on mortgages
- Right to forbearance for up to 1 year for mortgages
- Credit reporting protection for mortgage borrowers in forbearance or modified payments (includes non-federally backed loans)
- Temporary moratorium on eviction filings on renters
- CARES Act does not provide for servicer relief during forbearance period, which will likely result in potential liquidity pressure
- Increased demand for loss mitigation options across all consumer credit products
- Resulting strain on the housing market could have immediate impacts on mortgage availability and housing prices, with ramifications for the broader economy equaling or exceeding the 2007-2008 financial crisis
In addition to providing much-needed borrower relief, servicers have a vested interest in providing loss mitigation options to borrowers. On average, a performing mortgage loan costs 12 times less to service than a non-performing one, due to the additional expenses caused by the labor-intensive process and unreimbursable foreclosure and property preservation costs.4 In addition, the loss mitigation process can be rife with complications for servicers. Many of these challenges could directly impact consumers and may run the risk of being in non-compliance with regulatory requirements.
1: Mortgage Bankers Association, “Share of Mortgage Loans in Forbearance Increases to 7.54 percent,” May 4, 2020 https://www.mba.org/2020-press-releases/april/mba-survey-shows-spike-in-loans-inforbearance-servicer-call-volume
2: Black Knight, Mortgage Monitor – March 2020 Report,” March 2020 (https://cdn.blackknightinc.com/wp-content/uploads/2020/05/BKI_MM_Mar2020_Report.pdf); Chief Investment Officer, “30 percent of Home Mortgages Could Default, Moody’s Warns,” April 3, 2020 (https://www.ai-cio.com/news/30-home-mortgages-default-moodys-warns/)
3: Markets Insider, “UBS: Nearly $1 trillion in mortgage debt could be delinquent this year as a ‘prolonged credit crunch’ looms,” April 7, 2020
4: Urban Institute, “Servicing Costs and the Rise of the Squeaky-Clean Loan,” February 2016 (https://www.urban.org/research/publication/servicing-costs-and-rise-squeaky-clean-loan)