The State of Post-pandemic Loss Mitigation Facing Servicers

According to a report released by the Federal Reserve Bank of Philadelphia, around 2.15 million mortgages were in forbearance or past due as of April 7, 2022. That means there are a considerable number of borrowers that may be facing foreclosure when their forbearance ends.

According to Joe Davila, President and CEO of Selene Finance, in a recent interview with HousingWire, “Unless mortgage servicers can successfully execute home-retention options, many borrowers face the prospect of selling their homes or losing them.”  As servicers offer support through loss mitigation options, servicers must balance operational considerations as well as being compliant with federal, state, and local regulatory requirements.   

Here’s what will confront servicers in the upcoming months.

The Current State of Loss Mitigation

Because of the pandemic and resulting economic issues, the CARES Act foreclosure moratorium and subsequent Consumer Financial Protection Bureau (CFPB) temporary protections significantly limited foreclosure activities beginning in March 2020. However, by January 1, 2022, many of those limitations expired.  

In January, foreclosure starts increased and began approaching numbers similar to what we saw before the pandemic. They jumped to around 56,000 in January alone. Another 37,000 were recorded in February and 36,000 in March. Now that moratoriums have ended, we should expect an even larger surge of foreclosures.

As foreclosure starts rise, servicers continue to utilize available loss mitigation programs to help borrowers avoid losing their homes. The Federal Reserve Bank of Philadelphia report revealed that 45% of the mortgages that are now seriously delinquent and not in forbearance are on loss mitigation plans. But, of those, 72% aren’t paying.

Government Scrutiny Will Increase

As if mortgage servicing wasn’t complex enough, servicers can anticipate increased scrutiny and enforcement actions by the federal and state regulators. In December 2021, New York Attorney General Letitia James distributed a letter to servicers operating in her state reminding them of their obligation to help homeowners impacted by the pandemic.

Officials in other states also distributed similar notices. The letters stated servicers have had sufficient time to plan for homeowners exiting forbearance and the termination of foreclosure moratoriums and that there is no excuse for any lack of preparedness.

On May 16, 2022, the CFPB issued a report studying mortgage servicers’ actions during the COVID-19 pandemic. Current CFPB director Rohit Chopra stated, “[w]hile many mortgage servicers are successfully assisting borrowers to avoid foreclosure, today’s report highlights that some servicers are lagging their peers and are less well-equipped to assist borrowers.” Chopra added that the CFPB “will be closely monitoring mortgage servicer performance to ensure that they are meeting their obligations under the law.”

Former acting CFPB director Dave Uejio warned the CFPB, backed by the Biden administration, is “taking a close look at previous policies that hampered the bureau’s effectiveness.” They are also “simultaneously working nonstop through supervision and enforcement to ensure financial institutions are treating consumers fairly and playing by the rules.”

Expect a Rise in Contested Foreclosures and Lawsuits

The rising volume of foreclosure filings is expected to spur a high number of  homeowners contesting foreclosure actions. The percentage of those cases was already higher than the historical average at the end of December 2021. This trend is expected to accelerate this year.

According to law firm McGlinchey Stafford, borrowers routinely bring lawsuits against servicers predicated on compliance with Title 12 of the Code of Federal Regulations, Section 1024.41, the loss mitigation provisions of the Real Estate Settlement Procedures Act. Amendments to this rule by the CFPB in response to the pandemic offer additional potential grounds for lawsuits.

To protect against possible legal action, it’s critical that servicers maintain complete and clear documentation regarding foreclosure and loss mitigation activities for every borrower. Servicers must be ready to show the court that it has complied with all regulatory requirements before and after the moratoriums regarding loss mitigation and foreclosures.

Servicers Need to Be Prepared and Allocate Resources

In his HousingWire interview, Selene Finance’s Joe Davila was asked how servicers could prepare to help homeowners exiting forbearance plans. He replied, “The goal is always to keep the borrower in the home whenever possible. The servicer will provide outreach to borrowers in foreclosure as well and handle inbound calls where alternatives to foreclosure will be discussed.”

He added that, “Communication, borrower education, and training of consumer-facing staff are all critical elements to ensure your servicing operation is properly prepared. There are still many unknowns so the servicer will have to remain flexible and start to think about staffing the foreclosure teams because most of the foreclosure teams were reassigned due to moratoriums.”

Davila also pointed out that “the need to monitor state-by-state rules or potentially county-by-county in an automated fashion will be tricky and require technology enhancements and comprehensive training of the staff.” Also, “compliance with regulatory changes will require technology adjustments, training, and advanced reporting to identify real-time risk.”

During a webinar entitled “Restarting the Servicing Engine: Loss Mitigation After the Pandemic,” Selene’s Chief Revenue Officer John Vella pointed out that “companies need to be very nimble. Servicers must have the processes and people in place to react to any market situation.” Echoing Davila’s advice, Vella also emphasized that technology is a must-have for maintaining efficiency and accuracy, especially at a time when lacking efficiency and accuracy could lead to unwanted attention from regulators.