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Is Loss Mitigation Increasing with the COVID Crisis?

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From a financial perspective, we're experiencing a perfect storm of catastrophic proportions. Most countries, including the U.S., are expecting a COVID-19-driven recession. Even though the government has taken some countermeasures to stimulate the economy, loss mitigation will almost certainly increase in every industry, but particularly in the mortgage sector.

Government Response to COVID-19

In response to difficulties faced by U.S. mortgage borrowers due to the coronavirus, the Department of Housing and Urban Development (HUD), including the Federal Housing Administration (FHA), as well as Fannie Mae and Freddie Mac have provided increased access to existing forbearance programs for borrowers that are experiencing income losses due to COVID-19. Some private lenders have also followed suit.

On March 27, President Donald Trump signed the $2 trillion economic stimulus package called the CARES Act into law. The CARES act includes a long list of safeguards for homeowners who are experiencing financial hardship, many of which are in line with the programs previously announced by Fannie Mae, Freddie Mac, and HUD:

  • The CARES Act permits mortgagors with federally-backed loans on single-family homes to request a forbearance for up to 180 days, which could be extended for an additional 180 days.
  • To request a forbearance, borrowers must directly contact their mortgage servicer.
  • A forbearance of up to 90 days is possible for mortgagors with multifamily mortgages that are current on payments.

These provisions are seen as welcome relief for many borrowers, but the mortgage servicing industry is facing a severe crisis as the number of missed mortgage payments continues to mount.

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How Will Loss Mitigation Increase Due to COVID-19?

Loan servicers would prefer that borrowers make their loan payments on time and want to avoid having to deal with foreclosures. The court and administrative costs of dealing with bank-owned properties don’t make this an attractive choice. But, the current economic situation caused by COVID-19 is going to have lenders busier than ever with loss mitigation efforts such as loan modification, repayment plans, and forbearance agreements.

In a recent National Mortgage News article, Black Knight predicted that mortgage delinquencies could outpace the numbers this country saw during the Great Recession. The company estimates that, by the middle of May, close to 4.7 million loans were in forbearance (about 8.8% of active mortgages nationwide). And this could be just the beginning.

It’s important to note that nearly one in five, or over 38 million Americans, have filed unemployment claims since COVID-19 was declared a national emergency. In April, the unemployment rate soared to 14.7%, the highest level since the Great Recession, and the Fed projects that pandemic-related unemployment could reach as high as 32%.

Even with help in place for borrowers from the CARES Act, mortgage servicers are facing a “liquidity gap” because they must continue to pay bondholders during the forbearance period. Without any assistance from the federal government, that liquidity gap will continue to grow into the tens of billions of dollars. While some housing finance entities have implemented measures to address the gap, there are serious concerns that these won’t be sufficient to avoid a financial catastrophe.