The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) requires lenders on all government-backed loans to provide forbearance agreements on residential loan payments for a period of 180 days to any borrower that requests relief and affirms they are experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. As we near eight months since its enactment, the initial forbearance periods are beginning to expire. The CARES Act allows borrowers to request an additional 180-day extension, but that request must be made during the initial 180-days. With many borrowers likely unaware of their expiration date, it is unclear whether timely requests for extensions are being made and whether servicers will honor an extension request that is not timely.
Of the 6.1 million homeowners who entered COVID-related forbearance plans, 41% (2.4 million) have since exited, with the vast majority currently performing or in active loss mitigation negotiations with their lender. While those numbers appear positive, they provide little insight into what will happen with borrowers who suffered more long-term or permanent financial hardship relating to COVID-19, as it is safe to assume those who opted to exit forbearance agreements were able to resume making payments. Those who cannot afford to make payments will likely request an additional 180-day forbearance period if notified by their lenders that they can do so. Thus, a true picture of post-COVID default will not start to take shape until the second 180-day period expires. Black Knight, a mortgage data and analytics firm, estimates that if current delinquency rates continue, there will be more than 1 million excess delinquencies in March 2021 when the first wave of forbearances reach their 12-month expiration period. Even with the duration of COVID-19 impact remaining unknown, several forecasts predict delinquency rates caused by the coronavirus will dwarf Great Recession levels.
If the fallout from the Great Recession taught us anything, it’s that lenders and servicers should start preparing now, and not wait until the extended forbearance agreements end. Steps you can take immediately include (1) preparing for delinquency from a loss mitigation perspective, (2) preparing for delinquency from a foreclosure and litigation perspective, and (3) preparing for regulatory scrutiny.
Preparation for delinquency from a loss mitigation perspective begins with notifying borrowers of the upcoming expiration of their forbearance agreement and determining if they want to extend, if they can. For those not eligible for further forbearance, establishing modification programs with clear guidelines for eligibility, documentation requirements, and review processes. Additional steps include increasing staff and providing training regarding loss mitigation parameters and requirements, how to effectively communicate with borrowers, and how to promptly and properly review completed applications. Notice templates outlining requirements and providing information relating to review results should be created in consultation with legal counsel and outreach for applications for eligible borrowers should begin before forbearance plans end.
The second prong of preparing for delinquency is preparing for foreclosures and litigations for borrowers who do not qualify for modifications and cannot cure their delinquency. Reviewing state-specific pre-foreclosure notice, documentation, and other legal requirements with legal counsel before commencing foreclosure can identify potential flaws or weaknesses to be addressed before filing, instead of dealing with costly restarts to foreclosure actions or litigating alleged defects. Outside counsel should be consulted to gain an understanding of updated state and county-specific requirements and expectations for filings, potential court-ordered loss mitigation, and “hot topic” legal issues. The legal department should also be in close contact with their foreclosure counsel to review these processes and discuss case capacity and staffing levels to avoid delays in filings after referral or cases being terminated for lack of prosecution, all of which were issues in foreclosures that followed the Great Recession.
Properly preparing for delinquency will go a long way in avoiding regulatory scrutiny. If the issues regulators focused on coming out of the Great Recession are any indication, they will be paying attention to failures such as borrowers being unable to connect with someone about loss mitigation options despite several attempts, lenders and servicers providing incorrect or unclear information about options, and delays in processing applications for loss mitigation assistance. It will also be important for lenders and servicers to have trusted counsel monitoring regulatory activity, as it is likely new requirements will be implemented. Quick analysis and implementation of new regulatory requirements will be crucial to avoiding and enforcement action and the significant delays in prosecuting actions seen in foreclosures that followed the Great Recession.
Careful planning for what is likely to be an even bigger waive of similarly timed delinquencies will allow lenders and loan servicers to efficiently assist as many borrowers as possible and be prepared to defend against litigation and regulatory scrutiny that is all but inevitable.
