Mortgage service could be scrutinized early next year as the future government of Biden and some states are expected to take a tougher line with lenders who do not work with borrowers affected by the pandemic.
In April, the first round of leniency plans provided by the Coronavirus, Aid, Aid, and Economic Security Act will expire. The deadline for requesting new plans will come even earlier. Although the percentage of forbearance mortgages has decreased since June, concerns are mounting that some borrowers may not be able to resume mortgage payments when their plans end.
"When the forbearance runs out, the government will urge the servicers not to foreclose," said Jeff Naimon, partner at Buckley law firm, who represents the servicers.
President-elect Joe Biden could sway service policy if he quickly replaces the director of the Consumer Financial Protection Bureau, Kathy Kraninger, who is widely expected to step down or be fired by Biden in January.
It is not yet known who the Biden team will choose to help Kraninger succeed, or how the CFPB will force servicers to help borrowers. But the transition has drawn prominent 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 not working with borrowers on harm reduction strategies could face enforcement actions and fines under a new incumbent CFPB director who is likely to focus on helping consumers through the pandemic, observers said. Government mortgage servicing policies could also be influenced by steps Congress is taking regarding a new stimulus plan.
"It's no secret that the Biden administration as a whole is focused on helping consumers. This is a well-known political platform and how quickly this can be done," said Matt Komos, vice president of research and advice from the TransUnion credit bureau. "That is the big question mark – what will happen to the consumer and will there be more stimulus?"
The Biden government is also expected to urge the Federal Housing Agency and Federal Housing Administration to further extend leniency to help the struggling homeowners. In the meantime, several states are expected to work closely with a new incumbent CFPB director to coordinate operations and oversee service providers, as has been the case since the 2008 financial crisis. States that have set up their own "mini-CFPB" agencies – such as California, Pennsylvania, and New Jersey – may be particularly focused on the impact of the pandemic on homeowners.
A lower level of forbearance could be an illusion
The share of forbearance plans in all mortgages declined in the fall. According to the Mortgage Bankers Association, as of Nov. 22, around 2.8 million homeowners were on forbearance plans, or 5.5% of all outstanding loans. The number rose over 8% in May but has steadily declined.
However, the skyrocketing number of COVID-19 cases after Thanksgiving and concerns about the spread of viruses over the winter holidays have raised fears about further economic consequences.
"A looming concern is that many consumers are not paying back their loans or engaging in a harm reduction dialogue with the servicer," said Naimon.
The CFPB has been keeping a close eye on the servicers throughout the pandemic, and state regulators have regularly shared information with the servicers about the requirements of the CARES Act. Servicers have a special "Disaster Code" for pandemic-related leniency plans, similar to relief after hurricanes or other disasters.
A new acting CFPB director is likely to immediately reverse some of the measures taken by Kraninger, which has granted servicers limited regulatory relief on options for borrowers struggling financially due to the coronavirus.
A CFPB chief appointed by Biden could revise or roll back a joint policy statement suspending the enforcement and oversight of harm reduction regulations that place servicers under an obligation to work with borrowers seeking assistance. Kraninger pledged not to take public enforcement action against service providers who make good faith efforts to work with borrowers, but a new acting director is likely to change course.
"The Biden administration will impose the required penalty for any servicer who goes out of line," said Rick Sharga, executive vice president of RealtyTrac, a real estate research portal operated by Attom Data Solutions in Irvine, Calif. The CFPB had a reputation for Punishing companies, whether accidental or deliberate, and dealing with a borrower's place of residence and one mistake could cost someone their home. "
Recommendations from Waters
Consumer advocates are expected to have a stronger voice at the CFPB under a Biden government, and to push for strict surveillance and oversight of service providers, especially for borrowers who have deferred payments and face foreclosure.
Last week, House Financial Services Committee Chair Maxine Waters, D-Calif., Previewed steps a Biden-appointed CFPB team could take. In a 45-page letter to the president-elect, Waters recommended which Trump policies the new administration should reverse.
For example, Waters recommended that the CFPB revise a provisional rule starting in June that would allow service providers an exemption from Rule X regarding filing an incomplete loss mitigation application by a borrower. Waters noted that the CFPB must provide stricter foreclosure protection for consumers who have requested their mortgage payments be deferred.
Credit reporting and contacting minority borrowers are two areas where service providers are likely to be scrutinized, largely because default rates remain higher for borrowers with lower credit scores and higher debt-income ratios. Your loans are usually backed by the FHA, the Department of Veterans Affairs, or the U.S. Department of Agriculture for Rural Housing.
"Many servicers did not offer leniency to the CARES Act, be it ignorance or negligence, or the consumer did not ask for it," said Maurice Jorgain-Earl, executive director of ComplianceTech, a software company investigating Home Mortgage Disclosure Act data. "The coronavirus is hitting black communities more than others, and there needs to be more education and outreach."
The end of the forbearance plans will be a crucial test
For those currently in forbearance, a critical test comes next year when the first round of the CARES law deferral plans expire in April. At this point in time, potentially millions of borrowers are in need of mitigation at the same time. Without an additional stimulus package, more borrowers may be unable to make payments.
An immediate concern is that approximately 500,000 to 1 million borrowers have defaulted on their mortgages but have not begged forbearance, said Pete Mills, senior vice president of housing policy for the Mortgage Bankers Association.
The MBA has asked Fannie Mae, Freddie Mac, and the FHA for clarity on the specific deadline for borrowers to apply for a federal-sponsored loan leniency, which Mills estimates between late February and mid-March.
"It's still a question of how long the window is open to borrowers who haven't been lenient," Mills said.
In addition, many six-month forbearance plans are expiring or have already done so. In these cases, borrowers must contact their servicers for renewals, Mills said.
Last week the FHFA extended a moratorium on foreclosures on single-family homes through January 31.
Most servicers are willing to offer mitigation and partial deferral of mortgage payments due to CFPB and government service requirements following the 2007-2008 financial crisis.
"The only thing we learned from the last crisis is that servicers are now very good at modifying mortgages," said Karan Kaul, senior research fellow at the Urban Institute's Housing Finance Policy Center. "There is no way of predicting what the [Biden] government or Congress will do, but if nothing happens once a borrower has exhausted their indulgence, they are going the change route to get a temporary reduction in mortgage payments."
Unlike the last financial crisis, when house prices plummeted and many borrowers had their mortgages under water, this time around borrowers can refinance or sell their homes rather than foreclosure.
"One of the reasons I don't see another foreclosure tsunami is because homeowners are sitting on $ 6.5 trillion in equity," said Sharga of RealtyTrac. "When a homeowner is in dire financial straits, selling the property is a much better option than risking it all up to foreclosure."
Nevertheless, given the shaky economy and the raging coronavirus, there are still many unknowns.
"The results have not been as disastrous for lenders and investors as many expected, but no one can say what the cost of sacrifice at the household level was or what the future will be," said Konrad Alt, partner at Klaros Group, a consulting firm in San Francisco and former Chief Operating Officer of Promontory Financial Group.