This work was originally published in the September 2022 edition of DSNews The magazine is now online.
Mortgage servicers’ ability to assist customers affected by life events and economic factors has improved consistently since the U.S. Department of the Treasury first released the Home Affordable Modification Program (HAMP) in 2009. . Since then, the mortgage services industry has built on HAMP’s success by enhancing programs to help struggling homeowners avoid foreclosure. Some of these enhancements include streamlined fixes and improved consistency between investors/guarantors. We also further strengthened our programs to help customers affected by natural disasters (such as Hurricanes Harvey and Irma), providing immediate payment relief in a scalable manner.
Lessons from the COVID-19 coronavirus pandemic
As the world began to experience the effects of the COVID-19 pandemic, mortgage servicers faced new challenges. It’s all about creating and executing new programs while managing the impact of COVID-19 on your operations and workforce. The country’s unemployment rate jumped from 3.5% in January 2020 to 14.7% in April 20201, the first two months of the COVID-19 pandemic (2020). Forgiveness programs that ultimately offer up to 18 months of relief and resolution of arrears by adding outstanding payments at the end of the loan term are an effective solution and provide some significant loss mitigation. Demonstrate design principles.
- Consistency: Investor and insurer alignment is key to success and trust for both servicers and homeowners. Enhanced coordination between investor and insurer program offerings has enabled us to deliver programs at scale that deliver a clear message to our customers.
- Efficiency, Simplicity and Scalability: Simplified program design and reduced technical requirements, such as the elimination of signed contracts and submission of proof of hardship, have enabled relief to be provided on a large scale. Servicers can now also provide rapid assistance through multiple channels, including digital, voice recognition, and live agents.
- Clarity: Financially distressed customers want certainty that there is a way to get back on their feet. By offering a deferral option at the end of the grace period, the customer had an exit path that avoids future difficulties caused by the required lump sum payment.
Make extension permanent
The following key enhancements have helped our COVID-19 relief program succeed.
- Reduced GSE interest rates for clients with loan-to-value (LTV) less than 80%.
- Streamlined changes for FHA customers.
- 40 years of hotfix FHA development supported by Ginnie Mae Liquidity.
- FHA temporarily waives obsolete face-to-face meeting requirements.
A new set of challenges
You have three options for lowering your customer’s payment through change:
- lower your interest rate
- Reduction of unpaid interest-bearing principal (principal repayment grace period)
- Extension of amortization period
The first two options are constrained in the current environment by rising interest rates and rising house prices.
Interest rates will rise significantly in 2022, with Freddie Mac Primary Mortgage Market Survey (PMMS) 30-year fixed rate mortgages rising from 3.22% on 6th January to 5.54% on 21st July. Freddie Mac’s PMMS is the standard. Compatible with most industry change programs.
In many programs, the amount of relief available to customers through modifications that reduce the interest bearing principal is tied to the LTV ratio. As home prices rise, LTV ratios decline, limiting the ability of mortgage servicers to write down principal.
As a result, the industry now needs to consider new types of programs to provide needed payment relief to customers who have equity in their homes (~20%) and whose mortgage interest rates are below current market rates. there is.
Industry stakeholders may consider one or more of the following options:
- Allow a portion of the principal balance to be included in the partial billing/MRA, while re-amortizing the remaining interest bearing balance and maintaining the customer’s current rate. This solution requires GNMA to allow recasting within securities.
- Reamortization of mortgages over 40 years.
- Offer interest-only options (no negative amortization) to clients with strong equity positions, preserving the ability for clients to stay home with affordable payments, sell their homes when they choose, and participate in the future Stock valuation.
- Reintroduces a tiered interest rate change feature where the initial interest rate is below the market rate and rises to the market rate over the life of the loan. The HAMP program fixes the initial rate for five years, then increases by up to 1% each year until the market rate is reached.
- Establish a permanent VA partial billing program that aligns with the processing requirements established by the FHA and USDA and avoids the nasty complexities of VA’s COVID-19-only partial billing.