What the move to deferral means for mortgage servicing

delay payment Strategies widely used in the government-sponsored enterprise market during the pandemic are changing, suggesting the pandemic’s legacy in foreclosure prevention will be a more diverse set of strategies.

The annual number of deferrals in 2023 exceeded the number of deferrals for the second year in a row, with a total of 84,358 and 57,041, according to new fourth-quarter data released this week by the Federal Housing Finance Agency.

“The increased use of payment deferrals has been very noticeable during the pandemic, whereas they were rarely used in the past,” said Kanav Bhagat, housing policy and risk adviser at the Center for Responsible Lending.

But in the long term, deferrals have yet to outpace modules, suggesting the latter’s historic and ongoing importance in reducing losses.

As Great Recession, housing collapse forces businesses to Enter supervision In September 2008, they issued a total of more than 2.68 million mods and nearly 1.16 million deferred payments due to the widespread use of foreclosure prevention strategies.

Meg Burns, executive vice president of the Housing Policy Council, said modifications were initially more prominent after the crash because “borrowers were expected to need to make reduced payments, and modifications were the mechanism to accomplish that.”

“Despite the expectations of this crisis, beneficiaries can resume previous payments,” she added, noting that responses will ultimately have to adapt to longer-term hardship than initially anticipated.

Regardless of the relative relationship, the high numbers for both strategies suggest that both strategies have greater family retention efforts than other strategies (e.g. Discontinued Homesaver Advance (Only 70,178 borrowers used Homesaver Advance between 2008 and 2010.)

Burns said Mods “absolutely have a role to play because not all borrowers will be able to resume their previous payments. Therefore, the payment deferral approach cannot be a sole loss mitigation option.”

The deferment doesn’t present the same performance problems as Homesaver Advance, which policymakers have been trying to learn. Forbearance puts missed payments into an interest-free debt until the loan is due through a refinance, sale, or other payment.

Using a forbearance may cause the debt to become due when the original loan is paid off, but most borrowers will refinance or sell before then, and if they don’t, the servicer will usually work to establish manageable payments for the borrower.

The change in housing numbers does suggest that the pandemic may lead government agencies to develop a more diverse set of foreclosure prevention strategies that may focus on honing the core idea behind extensions of retention.

“Some of us believe that what’s missing is a set of tools that would allow servicers to have some source of funding when debtors default on their debts, rather than putting debtors into forbearance,” Burns said. reserve account and insurance.

The extent to which this concept can be extended to other government-related housing programs beyond Fannie Mae and Freddie Mac remains to be seen, and other programs are structured differently.

The VA ended the pandemic partial claims program in October 2022, citing budget impacts, but the agency later extended the pandemic modification option and began developing follow-up plans because of subsequent issues.

As of this writing, subsequent plans to purchase VA services are still pending. The program will be released this spring. VA has asked the service provider Check this department before proceeding with any foreclosure at the same time.

The VA partially guarantees the loan, which helps make some claims more economical.

At the same time, FHA has been taking steps, such as adjusting its housing retention strategy, to address specific market conditions that have recently affected its program constituents: issues that have arisen due to: The difference between original interest rate and market interest rate.

This development suggests that current market conditions will have some bearing on whether the current trend toward preventing foreclosures continues.

“Interest rates are going to change, the labor market may be strong or weak, and the direction of home prices will be another key factor in determining whether borrowers are in distress,” said Michael Neal, senior fellow for housing finance at the Urban Institute Policy Center.

“Perhaps lending standards will come into play to a lesser extent,” he added. “Before the pandemic, standards were more controversial than they were in the years leading up to the Great Recession.”

“My hope is that, post-pandemic, we’ll be able to understand more about how what we’ve done recently is different from the past, and frame it around what lessons have been learned and what that means for the future,” Neal concluded.

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