The New Normal: Servicing in a Post-Crisis World
In the years since the crisis we’ve made important strides in making the servicing industry stronger, more efficient and better able to help struggling borrowers. Today, servicers have broadly delegated authority to make modification decisions and offer more generous modification terms to borrowers such as step-rate mortgages and partial principal forbearance. In addition, we’ve made it possible for them to modify loans without documentation through our streamlined modification program.
We learned a lot of valuable lessons along the way – I’ve called out the top five below. I would also be remiss in not mentioning the important role the Treasury’s Home Affordable Modification Program (HAMP) played in helping to jump-start our efforts by quickly setting standards for the industry to help borrowers in a unified way for the first time.
Five Lessons Learned from the Crisis
Lower payments. Sufficient payment relief is probably the biggest predictor of long-term success for borrowers and it also drives ongoing modification performance.
Earlier borrower engagement. The earlier you can engage with a borrower, the better your chances of completing a modification and the better it performs over time.
Reduced documentation. This has been a clear winner for both servicers and borrowers by creating process efficiencies for servicers while reducing barriers to assist homeowners.
Simpler programs. Simple is better for a reason – complex requirements translate into inconsistent application of programs.
More feedback. Feedback has been critical in helping us to evolve our programs and policies so we introduced more forums to listen to customer feedback. Importantly, we also took action.
Together with our servicers we have helped nearly 1.2 million struggling homeowners avoid foreclosure since the crisis began in 2009. Our serious delinquency rate – the percent of borrowers who are 90 days past due or in foreclosure – is at its lowest level in seven years. And an improving housing market and economic picture bode well for many homeowners who are underwater or struggling.
But we still have work to do. First, we have to continue to find solutions for those borrowers who are deeply delinquent. At the end of 2015, we had approximately 140,000 seriously delinquent loans – 26 percent of those borrowers were more than two years behind on their payments. For these borrowers we’re taking a targeted approach, including pilot modification programs with specific servicers.
Next, we have to prepare for a new future in servicing, or a “new normal” as we like to call it at Freddie Mac. The post-crisis servicing model of the future, 2017 and beyond, will look very different. Our current outlook suggests there should be far fewer underwater borrowers, rising mortgage interest rates and more localized patterns of booms and stress in the housing market and the economy as a whole.
Preparing for a New Normal
One of our biggest challenges is making sure that our loss mitigation programs continue to be effective for tomorrow’s struggling homeowners. A big part of the new normal includes planning for the sunset of the HARP and HAMP programs, which expire at the end of 2016. Does the market continue to need a HAMP-like modification or are adjustments to current proprietary modification programs sufficient to fill the void left by HAMP? These are important considerations we’re thinking through with our regulator, the Federal Housing Finance Agency, and the industry. However, I think it’s important to note that the majority of modifications we complete today are through our proprietary programs.
The way that we assess borrower eligibility will also have to be considered in the new normal. When do we require documentation? When is it appropriate to leverage a more streamlined process? And when we do require documentation, what is really needed from the borrower for us and our servicers to make an informed decision? In addition to answering these questions, we’ll also re-evaluate how we determine imminent default. Or goal is to create standards that responsibly address our needs as well as those of the borrower and the market.
And finally, we’ll have to help our customers prepare for the new normal. During the transition, it’s important that they continue to have effective loss mitigation programs so our Standard and Streamlined Modification programs will continue to be part of their toolkit into 2017. In time, we’ll align our Servicer Success Scorecard with our goals for this evolving market.
At Freddie Mac, we’re working hard to prepare ourselves and our servicing customers for a new normal. What will not change is our commitment to homeowners and communities nationwide.