Loss Mitigation Response to COVID-19 Pandemic
March 29, 2020
Dear Clients and Friends,
In this unprecedented time, we wanted to share some best practice advice on how to address the current economic turbulence.
The passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act stipulates that every borrower who attests that they have been directly or indirectly impacted by the COVID-19 pandemic, regardless of delinquency, is entitled to a forbearance plan up to six months, with an additional up to six months extension. The servicer may not require any additional documentation to either validate the hardship or establish an affordable reduced payment option.
Recent news reports have stated that 4 in 10 households have seen a reduction of income due to the health and safety orders that have been issued by state governments. While we cannot say for sure that 40% of mortgages will soon default, the numbers are staggering.
Many of our clients are involved with GNMA and other MBS securities or Freddie Mac servicing, which requires the pass through of Principal and/or Interest regardless whether the borrower made the payment or not. A portfolio with a high percentage of non-paying loans will lead to a liquidity crisis for many companies. And the requirement for servicers to keep paying real estate taxes and insurances for escrowed borrowers, despite not having fully funded escrow accounts, will put a tremendous strain on the cashflow of most servicers.
Therefore, we are offering this advice to affect the best possible outcome for all parties involved; borrower and servicer.
Customer Service, Loan Counselors and Collectors should be trained to discuss the following points with the borrower, prior to the release of the Forbearance Plan:
While payments will be deferred, they will still be owed. After the forbearance period, the borrower would be asked if they needed additional forbearance, could bring the loan current through a short term repayment plan or would need to pursue a loan modification.
While many loans may be modified at the end of the forbearance plan to the same or better interest rate, there is a risk that the interest rate on the loan will increase. This will depend on the market conditions at the time the plan ends. This could significantly increase the future mortgage payment. This risk is greater for government insured loans (FHA, VA and Rural Housing).
With the government approved stimulus checks, state and federal unemployment payments, the borrower should be encouraged to keep the loan current. If they do not believe this is possible, they should be encouraged to pay an amount they were comfortable with to offset the total amount due at the end of the plan. If the borrower does not think they can afford anything, suggest a payment of $10 per month. A plan of $10 per month will keep the borrower in the habit of paying something each month and give the servicer an opportunity to reach out to the borrower to determine if forbearance is still needed.
Borrower should be advised that they may always send in additional funds when available and they will be credited towards the amounts due.
No late charges will be assessed or accrued during this forbearance period.
According to the CARES Act, if the loan was current* at the time of the Forbearance, the loan will be reported as current through the Forbearance period, up to the July 2020 reporting cycle. *Note: The term is not defined by the Act, but we believe it is fair to interpret that the loan was within 30 days delinquent.
If the loan was already delinquent, the loan will continue to be reported as delinquent.
If a foreclosure action had been initiated on the loan, all foreclosure related actions have been placed on hold until May 18, 2020 – this hold does not apply to vacant or abandoned properties.
Issuing the Forbearance Agreement
The Act allows the servicer to issue a forbearance agreement up to 6 months. It is our recommendation to limit the initial plans to 3 or 4 months. It can always be extended if necessary, but will force the borrowers to remain in contact through the process and potentially limit the time the servicer will be forced to advance funds.
The servicer should be touching base with the borrower at least monthly to determine if circumstances have improved and if they can work towards a permanent solution to the default.
End of Forbearance Period
Per the Act, the covered period of these provisions ends on the date that the President announces the end of the National Emergency or December 31, 2020, which ever is sooner. The servicer may continue to extend forbearance during this time.
During the month that the last payment under the plan is either due or forbore, the servicer should contact the borrower to determine the next course of action:
Additional Forbearance – if the borrower states that their situation has not yet improved, you may extend the forbearance up to 6 months. Once again, we suggest a 3 to 4 months forbearance. We suggest that the borrower is asked if they can afford any additional payment towards the arrears and adjust the forbearance plan based on the current circumstances.
Repayment Plan – if the situation has improved and the borrower believes they can repay the amount due within 3 months, the servicer is encouraged to establish an informal Repayment Plan. Please note, that if the borrower is unsure if they can bring the loan current within 3 months it may be best to suggest that the borrower submit a loss mitigation application to see which loss mitigation program is best for their particular circumstances. It is always best to work to bring the loan current as soon as possible.
Modification Program – depending on the delinquency status of the loan prior to the forbearance and at the end of the forbearance, there are different programs available. Some do not require much documentation and others require a fully documented loss mitigation application. We believe more clarity will be provided by insurers and investors in the near future.
DLS Servicing Consultants Service Offerings
DLS Servicing has prepared programming and customized services related to assisting our clients through this difficult time. Our loss mitigation system is fully capable of scaling up to manage the additional needs of all of our clients, as well as new ones.
Forbearance Agreements –
Prepare and Mail the Forbearance Agreement with wording that reminds the borrower of the information provided in the initial contact, for the term established by the client. Letters will include client’s logo and contact information.
During the month of the last due installment – contact the borrower through email or letter to determine next steps. Either mail an updated forbearance or a loss mitigation application based on borrower response. If no response, send the loss mitigation application.
Provide this service at a reduced fee, in most cases it will be approximately 25% or less of our current full processing and underwriting services.
No Documentation Modifications –
When the Insurer and Investor permit a no documentation modification at the end of the forbearance period (as in the case of current loans impacted by a natural disaster), perform a current escrow analysis, calculate the capitalized amount and calculate the new repayment terms.
Prepare the modification documents, in recordable format for all jurisdictions in all 50 states.
Provide this service at a reduce fee, at approximately 50% of our current full processing and underwriting services.
Please contact Donna Schmidt if you are interested in our assistance – firstname.lastname@example.org
As we speak, WaterfallCalc.com is being programmed to manage the new forbearance offering for all loan types. We anticipate they will be ready by the middle of April, if not sooner.
Once completed and made public, we will publish user information on how to access this functionality on our website.
Stay safe and sane!!!