May 19, 2021|CFPB, Consumer Behavior, Credit, Mortgage Industry, Virus Response
In high school I read a miserable existentialist play called No Exit (Huis clos) by Jean Paul Sartre. Fortunately, none of us are doomed to the hellish fate of those 3 characters (I hope). Yet, something about the whole discussion of forbearance exits reminds of that play (perhaps it’s the word Exit?). So, anyway, I thought I would provide a short “play” of my own of sorts about forbearance exits. But first, some background.
CFPB’s view of forbearance borrowers
The CFPB has a clear vision of what the typical mortgage forbearance borrower looks like. You can read all about it in their new proposed servicing rule. As you can imagine (because I know you aren’t going to actually read that last link), CFPB believes most people who remain in forbearance remain negatively impacted by COVID-19 in ways which require compassionate, non-discriminatory treatment with full information about options. CFPB’s rules and enforcement priorities in the mortgage space right now are focused around ensuring that these kinds of borrowers are treated fairly with opportunities to modify, extend, defer and otherwise get financial accommodations to allow them to remain in their house.
Is the CFPB’s vision 20/20?
All of that is good in theory, except recent data from the MBA on borrowers exiting forbearance seems to show that only about 35% of exiting forbearance borrowers (from June 1, 2020-May 9, 2021) are the type of borrower CFPB probably needs to protect[1]. The overall share of borrowers still in forbearance continues a slow march downward which may tend to concentrate the remaining borrowers in more difficult categories, but the manner in which borrowers exiting forbearance to date seems to be a developing story that bears further consideration.
Specifically, despite the CFPB’s laser focus on economically vulnerable consumers, according to the MBA’s data, only 10% of forbearance exits are getting modifications compared to 15% who are paying it all back at once. Similarly, while roughly a quarter of the exits are deferring the unpaid amounts, the same amount seemed to never need the forbearance to begin with. That leaves around 25% going into the default management/foreclosure funnel. With real estate values staying strong, CFPB won’t like the incentives for servicers to threaten and pursue foreclosure, but the servicers have a duty to get investors’ money paid back and with real estate values strong, pushing foreclosures (despite the time delays involved) may still yield the best results for all (since borrowers with equity can sell and avoid adverse credit impact).
The Forbearance Exit Dialogues
With that as background, conversations likely happening at servicing shops around the country with borrowers about forbearance exit popped into my head. From my perspective, the MBA data essentially indicates there are 4 basic categories of different types of exiting borrowers. These exit types are each illustrated below in versions of my “Forbearance Exit Dialogues” (salted with a bunch of links to my prior Mortgage Musings). Of course, these conversations are completely imagined[2], so they are, in reality, more a monologue[3]. CFPB will probably not agree with my characterizations of these 4 types of exiting borrowers, but, I’m hoping my readers will enjoy it anyway.[4]
1. Never used forbearance (25% of all forbearance borrowers).[5]
SPOC[6]: Hello, this is Mr. SPOC from your lender, your forbearance period is expiring, and we need to discuss options for you to get back on track.
Borrower: Forbearance, what is that?
SPOC: You signed up for a government mandated COVID-19 relief program where your mortgage lender will not consider you in default or pursue its remedies due to non-payment while you remain in the program. The program had a time limit.
Borrower: Oh that. What about it?
SPOC: I see here that you actually have been paying your monthly mortgage payment all along anyway. Do you need an extension?
Borrower: If by “need”, you mean “want” then yeah.
SPOC: Right, ok, so I assume you don’t need forbearance and I can take you off the list.
Borrower: Wait, why would I want to give up the option to miss a payment later?
SPOC: Because, it’s not really a free lunch.
Borrower: Yeah, I guess I might want to get a second mortgage soon, so please take me off forbearance.
2. Used forbearance, but probably didn’t need it (15% of all forbearance borrowers)[7]
SPOC: This is Mr. SPOC from your lender, your forbearance period is expiring, and we need to discuss options for you to get back on track.[8]
Borrower: I knew this day would come.
SPOC: Ma’am?
Borrower: I used forbearance during COVID because we were all super worried about what kind of apocalypse was going to happen to the economy, my job, how long it was going to last and what it all would mean for me and my family. Then, it got really easy not to pay the mortgage. But, I knew you would eventually call.
SPOC: So, what is your plan?
Borrower: The cash is in the bank. We never needed it because, thankfully, the zombies never came. Can I wire you right now to reinstate?
SPOC: Surely, you can, but the CFPB thinks you are making bad financial decisions because you worry too much about COVID-19. Are you certain you don’t want to extend your payment obligations over the life of the loan or pay it all off at the end?
Borrower: Yes, I am certain. You can tell the CFPB that I know what a loan mod will do to my credit score, and …, don’t call me Shirley.
3. Probably needed forbearance and willing to pay it back if possible (35% of all borrowers)[9]
SPOC: This is Mr. SPOC from your lender, your forbearance period is expiring, and we need to discuss options for you to get back on track.
Borrower: Thanks for calling. From my mortgage originator to you servicing folks, you have all been great in this time of crisis. Now, what are my options?
SPOC: [in full excruciating detail desired by the CFPB] (i) pay the deficiency in full now and restart monthly payments, (ii) loan modification to pay it back over time, (iii) defer the balance to the end of the loan, or, …, default procedures.
Borrower: I’m guessing “default procedures” eventually means foreclosure, but is there any way you’ll just let me have a free house?
SPOC: Inconceivable!
Borrower: Ok, I guess I knew that. Can’t hurt to ask, right?. What’s the best deal I can get?
SPOC: [lawyer-scripted disclaimer language] … Probably just put the balance at the end of the loan.
Borrower: [120 days later] I have analyzed the options, my current income and expected future financial condition with financial, accounting, legal and spiritual experts (none of whom were mentally impaired by COVID at the time) and choose to do whatever that deferral idea was.
4. Maybe needed forbearance, but aren’t paying it back… yet (25% of all forbearance borrowers)[10]
SPOC: This is Mr. SPOC from your lender, your forbearance period is expiring, and we need to discuss options for you to get back on track.
Borrower: I’m not home right now, please leave a message.
SPOC: But you actually just picked up the phone and I am talking to you right now.
Borrower: Ok, you got me, but I already know my options.
SPOC: You do? So, what is your plan for repayment?
Borrower: What if I don’t repay?
SPOC: Default procedures.
Borrower: Like what consequences does that entail? Just letters, calls, and more calls and letters?
SPOC: Yes, …, and foreclosure and eviction proceedings eventually.
Borrower: When?
SPOC: I don’t know, but as soon as possible.
Borrower: And if I extend forbearance?
SPOC: We’ll have to leave you alone for another 3-6 months.
Borrower: Nice. I also heard the CFPB is going to prevent foreclosures until the end of the year because they say I’m not thinking straight due to COVID. My defense lawyer is actually using that same “not thinking straight” excuse as my defense to trespassing and vandalism charges for my actions at the Capitol on January 6.
SPOC: Good to know. By the way, it looks like your house has probably appreciated in value, so when we foreclose, we’ll get all our money back and then some. And it doesn’t seem likely that the CDC is going to extend the eviction moratorium again either.
Borrower: Really? Thanks for those insights. I might just sell this place right away because my lawyer’s fees are due and he’s threatening not to defend me if I don’t pay up.
I suppose there is another category of borrower that never has a conversation with Mr. SPOC, but that would be someone else’s monologue.
[1]See Dialogue category #3 and footnote 10 below.
[2]Not the Musings links. Those are real.
[3]Those of you hoping for a reference or link to a play about private body parts will now be disappointed.
[4]Some will enjoy it precisely because of that.
[5]These folks should never have had forbearance since they clearly never had a negative COVID impact (at least not one that would impact their ability to pay their mortgage debt). 25% of exits shows it was way too easy to get forbearance without any evidence of hardship.
[6]SPOC stands for “single point of contact” customer service or loss mitigation representative
[7] These folks are similar to the first group who never used forbearance except they took it a step further and used the forbearance but reinstated with a full catch-up payment. If they can pay the deferred debt off at once, they most likely never had a negative COVID impact although there could be some who had income disruption and savings that were tapped later.
[8] Yes, the first question is always the same.
[9]These are the folks the CFPB thinks they are (and should be) helping.
[10]There’s actually two kinds of people in this category: (i) the deserving borrower who is still out of work due to COVID (and not getting paid more not to work by the government) who may be able to shift to category 3, and (ii) the borrower illustrated in the Dialogue, who, absent consequences for undesirable behaviors will not change behavior.