The mortgage servicing industry is once again navigating the waters of a crisis. As evidenced by the approximately 2.9 million[1] homeowners who have recently requested forbearance, residential mortgage borrowers are struggling with impacts from COVID-19. The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes mandatory payment forbearance for those borrowers with a Federally Backed Mortgage Loan.[2] Borrowers must request relief by contacting their mortgage servicer. Servicers are again tasked with handling large volumes of borrower inquiries, requests and understanding the guidelines published by Congress, Fannie Mae, Freddie Mac, FHA, VA, and USDA.
Lessons learned from the previous financial crisis can help servicers prevent the regulatory aftermath from which many are just now recovering. By implementing best practices now, servicers may be spared years of remediating and documenting errors.
Best Practices
Research
Now is the time to “know your customer”. Ensure that you know the tranches within your servicing portfolio. How many borrowers have a “federally backed mortgage loan”? What type of private investor loans do you have in your portfolio? Is forbearance allowed by these private investors and, if so, what are the repayment options? Research may be required to understand borrower options available with private investors. Policy decisions will be needed for portfolio loans.
Each investor option in your servicing portfolio should have a clear defined path from forbearance to repayment and this path should be disclosed to the borrower.
Document, Document, Document
In the post-COVID-19 world your company may be called upon by investors and/or regulators to explain decisions that were made or processes that were changed and implemented. Each step along the way should be clearly documented so that questions can be answered.
Decisions
- Document decisions made for how to triage incoming requests;
- Document how forbearance requests will be handled for each investor, insurer, guarantor and state with applicable guidelines; and
- Document how forbearance requests without guidelines will be handled.
Process, Policies, and Procedures
- For each of the decisions above, map the process;
- For each process, document policies with applicable approvals;
- For each process and policy, document procedures; and
- For each process, policy, and procedure, document escalation processes, policies, and procedures.
Use Cases and Scripts
- Develop and document use case scenarios for incoming requests;
- For each use case, script the response to be used with borrowers;
- Ensure consistency in scripts and that scripts align with investor, insurer, guarantor, and state guidelines; and
- Ensure scripts align with any internally established policies.
Train
- Use formal and informal training to ensure good customer service. Document materials and attendees;
- Use role-playing to review responses for each use case scenario;
- Consider including techniques for calming and de-escalating borrower frustrations;
- Monitor calls to determine script compliance and to determine opportunities for improvement
Manage
Electronic Information
- Reduce long hold times for borrowers by providing as much information on-line as you can so the process can start before the first phone call is made;
- Customize interactive voice response (IVR) systems to strategically direct incoming customer calls;
- Consider the use of social media to help borrowers understand “before they call”.
Personnel Support
- Make sure telephone personnel have adequate breaks;
- Maintain daily touchpoints to discuss challenges and resolutions;
- Provide constructive feedback to front-line personnel;
- Document and disseminate information quickly and concisely.
Conclusion
Explaining options available to borrowers presents many challenges. Based on recent news headlines, servicers face the following challenges:
- Many borrowers do not know if they have a Federally Backed Mortgage Loan. FHA, VA, and USDA loans are a bit more obvious, but loans that were purchased or securitized by Fannie Mae or Freddie Mac will take a bit of research from the borrower. In reality they will probably call their servicer, and the servicer will need to determine whether the loan is a Federally Backed Mortgage Loan. This is the first step in the customer service triage.
- Forbearance is not available for all borrowers. If the borrower’s loan is not included in the definition of a Federally Backed Mortgage Loan, and approximately 30% of the current residential mortgage market is not in this category, the forbearance plan is not mandatory. Many servicers are choosing to offer forbearance to borrowers with non-Federally Backed Mortgage Loans, however, the servicer is under no obligation to follow the terms of the CARES Act. The customer service representative must be fully prepared with scripts, training, and procedures to clearly explain to the borrower their specific situation, including what happens after the forbearance plan ends.
- Forbearance does not erase what is owed by the borrower. The borrower will still have to repay any missed or reduced payments in the future. The media does not always report this fact so it may come as a surprise to some borrowers.
- The form of repayment may not be the same for all borrowers. For instance, Fannie Mae and Freddie Mac have published waterfall guidance that includes an evaluation of the borrower’s ability to repay in the following order: reinstatement in a lump sum, repayment plan, and a deferral if the borrower is financially able to pay the original contractual payments and a loan modification if the borrower has experienced a reduction in income or an increase in expenses and is no longer has the ability to pay the original contractual payments. FHA, VA, and USDA loans have slightly different requirements for repayment. Customer service personnel must be well versed on all of the options and requirements of each Federally Backed Mortgage Loan type.
- Forbearance does not automatically equal deferral. While forbearance is defined as a deferral of payments, the term deferral has specific meaning in the mortgage industry. The industry considers a deferral to be unpaid payments added onto the end of the mortgage and paid by the borrower in a lump sum at the maturity date, or with payoff of the loan. Deferral is a waterfall option in the Fannie Mae and Freddie Mac guidance, but is third in the waterfall options and has payment performance requirements. The FHA, VA, and USDA have also issued guidance for deferrals.
As the industry braces for what is surely to be challenging times ahead, it is important to effectively communicate to borrowers about all of the terms and impacts of forbearance before they agree to accept them. Borrowers must understand how repayment options are determined and what is expected from them as part of the process. Educating borrowers on the established forbearance protocol and repayment options will be critical in the success of the program for all parties. Update websites, social media, document, write scripts/train customer service representatives, and provide an escalation process for difficult and unique questions. Develop testing that ensures the process you intended has the desired impact. Avoid the co-mingling of terms that is prevalent in the media and ensure all communications are factual and thorough. Borrowers will need to know all that is expected of them so they can perform accordingly and document now so that you will be able to clearly present your implemented response to COVID-19.
[1] https://www.npr.org/sections/coronavirus-live-updates/2020/04/20/838435346/nearly-3-million-homeowners-get-mortgage-help-but-others-hit-roadblocks.
[2] “Federally Backed Mortgage Loan” means any loan which is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from 1-to 4-families that is: (1) insured by the Federal Housing Administration under title II of the National Housing Act (12. U.S.C. 1707 et seq.); (2) insured under section 255 of the National Housing Act (12 U.S.C. 1715z–20); (3) guaranteed under section 184 or 184A of the Housing and Community Development Act of 1992 (12 U.S.C. 1715z–13a, 1715z–13b); (4) guaranteed or insured by the Department of Veteran’s Affairs; (5) guaranteed or insured by the Department of Agriculture; (6) made by the Department of Agriculture; or (7) purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.