The ongoing discussions in Washington regarding a second COVID stimulus package, involving over $1 Trillion in funding and $2000 individual payments, which follows the previous $600 individual payments in December, masks a growing foreclosure crisis that should be a concern for mortgage lenders. COVID forced all “non-essential” business into hibernation and caused widespread unemployment, underemployment and financial instability on “Main Street.”
Perhaps forgotten in the hubbub surrounding the 2020 Presidential election and the US Capitol incident is the fact that since March 2020, millions of Americans have been suffering severe financial stress. Increased unemployment benefits, the PPP loan program, and the two completed government recovery payment initiatives have not fully and permanently solved the problems facing many Americans. Defaults are up, due to the ending of mortgage forbearance programs, rents are seriously delinquent, commercial properties remain vacant, small business continue to close, and there is only so much government funds and cash-out refinances to go around.
The mortgage industry has been insulated from these facts because lenders and their employees have been the beneficiaries of the largest mortgage boom in over 15 years. With historically low interest rates, loans are being refinanced over and over again to lower costs and raise cash giving the illusion that the rise in financial transactions (and the attendant healthy revenue received by lenders) is a sign of overall economic good health. In addition, ambitious programs planned by the incoming Biden Administration will clearly require an increase in both corporate and personal taxes to cover the cost, which means that much of the financial gains seen by the industry and their employees may be redistributed to cover Trillions in expected government expenditures.
I recently spoke to a neighbor who has been out of work and took advantage of the mortgage forbearance program. They stopped paying their mortgage. They received the increased unemployment benefits and government payments and spent the money to cover food, clothing, medicine and other necessary living expenses. They did not place mortgage payments in reserve. Two weeks ago they received a 30 day demand to cure the unpaid balance of over $30,000 in mortgage payments, which they are unable to do, thus triggering a foreclosure action. They are confused and upset because they clearly did not understand the nature of forbearance, which is not the same as forgiveness. The same personal consequences are occurring with respect to rent abatement and debt collection freezes. We have seen this scenario play out before.
After the boom period of 2002-2005 the mortgage industry saw tremendous financial gains evaporate in foreclosures, buy backs and make-whole demands surrounding massive defaults. There is no evidence yet that the extent of the current crisis will match the old one however lenders are urged to show caution and prudence in future business planning. The nightmarish consequences of foreclosure fraud, straw buyer fraud, short sale fraud, builder bailout fraud, and repurchases are an oft repeated cycle that may be on the horizon although it is not yet clear.
What is clear is that regulatory scrutiny will soon ramp up and there will be increased audit risk in the months ahead. Lenders need to ensure proper credit risk assessment is taking place, regulatory and compliance departments are engaged and effective, and that compliance policies and procedures are measured and followed. Now is not the time to manage future risk by simply “originating more loans.”
Lastly, third party vendor risk must be a top priority to protect lenders from loss of funds and deter the type of fraud that can result in unwanted agency and investor repurchase demands. It is not prudent business practice to wait until loss mitigation to discover that your attorney or title agent facilitated fraud while you were too busy to notice.