First, we are hoping all our friends and clients are currently in safety and that none of you have been directly affected by the COVID-19 virus and that all your loved ones are safe and secure.
The wide impact of this National Emergency has put it on scale with the Housing Crisis of 2008 and in fact may even be more serious. Unlike the response to natural disasters, we have no way to isolate the homes and families that may have been impacted. Therefore, there is no way to get out in front of this and provide more efficient forms of loss mitigation relief.
Loss Mitigation Guidance
We have reviewed the recent releases by the major federal agencies and the good news is that the current loss mitigation strategies currently offered by:
Rural Housing Services (USDA)
will be effective in providing forbearance relief to all borrowers who are either unemployed, under employed, stricken with the illness and on extended medical leave, or on family leave while they care for a loved one. The exception is FHA.
FHA only offers a special forbearance plan, with suspended payments that is not required to bring a loan current at its conclusion, for unemployed borrowers. The guide does not offer a loss mitigation option for a borrower that does not qualify for a HAMP option and who are experiencing a temporary significant reduction in income, or who are on a medical related leave from their work. We are hoping this will change.
Based on this information we are recommending the following:
1. Borrowers should not be encouraged to submit a loss mitigation package/application until they have defaulted on their mortgage. The standard loss mitigation options for the government insurers, prohibit issuing a forbearance agreement that suspends or reduces the borrower’s payments until they are 61 days delinquent (though RHS does permit a release at 30 days delinquent). Therefore, the borrower should be encouraged to keep the loan current if possible. Once the loan is due for one full payment, it is standard industry practice to mail a loss mitigation application to all borrowers within the 32-45 day of delinquency – this should not change. We are recommending that you suspend credit reporting for those loans where the borrower has advised they are negatively impacted by COVID-19.
2. Once an application is received the borrower should be evaluated by documenting the reason for default, including whether their income or health was impacted, or if they are caring for someone who was impacted. Be respectful of protecting each borrower’s health privacy. We recommend that you have your compliance department review the best way to document the reason for default.
3. Establish a true monthly budget and for those borrower’s who have experienced a reduction of income, calculate a reduced payment based on their current income. For some borrowers that might be some fraction of a payment (3/4, ½, 1/3, ¼). For those that show a significant negative cashflow, we still recommend that you put the borrower on a plan of at least $10 per month – this will keep the borrower engaged with you through the forbearance period. The forbearance period will be 6 months for GSE conventional loans. RHS does not give clear direction on the length of a plan, except that the loan may not exceed 12 months delinquent during the plan. VA suggests a 4 month plan. We believe for this instance that a 6 month plan is prudent. Note that the servicer MUST maintain monthly contact with the borrower to determine if a change of circumstances would result ending the forbearance period and a move towards a permanent resolution of the default. The overall goal would be to provide assistance for only the period of time the borrower will need and to resolve the delinquency as soon as possible
4. For FHA loans – we suggest preparing a 6 month forbearance plan of reduced payment, but submitting them to FHA for a variance before offering it to the borrower. This is to protect the servicer in the event of a future audit.
5. Forbearance plan may be extended beyond the 6 month time frame if warranted. We will cross that bridge when we get to it.
6. After the reason for default has been resolved, the borrower will have to submit an updated application and it would be reviewed as normal.
DLS Servicing Clients – Loss Mitigation Outsourcing
We have heard from many of you, wanting to know if we will be able to assist you with the anticipated influx of assistance applications. The short answer is yes! We are actively working to significantly increase staffing and put new training and oversight measures into place. We have recently moved to a new, larger office, with room to expand. Those expansion plans were put into place as of yesterday and are being managed as we speak. We will be ready to receive significant increases in volume by May 1.
WaterfallCalc.com Clients We are currently working on adding more flexibility to the forbearance plan options, including a way to create a forbearance plan for FHA loans that would require a variance, but provide the information you need to submit for a variance. We anticipate that this will all be ready by May 1.