The market's experience with pandemic-related forbearance and programs that allow postponed payments to be added to the end of the loan could give rise to broader application of such strategies.
That was the overarching takeaway from a recent online event held by the Urban Institute's Housing Finance Policy Center on the future of loss mitigation.
"It seems reasonable to think of what a post-COVID version for standardized forbearance might look like," Laurie Goodman, fellow at the Urban Institute's Housing Finance Policy Center and the co-author of a proposal to extend regular use of forbearance to other circumstances.
Based on the extent to which forbearance and deferrals have staved off foreclosures to date, the proposal suggests moving from their traditional use in conjunction with disasters, and as a temporary response to the pandemic, to other documentable hardships.
Those hardships would include a qualifying health issue under the Family and Medical Leave Act, job loss, a co-borrower's death, or the start of divorce proceedings, said Goodman, who co-authored the paper with former Ginnie Mae President Ted Tozer, and Alexei Alexandrov. Alexandrov previously was the chief economist at the Federal Housing Finance Agency.
"We understand that forbearance works best for temporary hardship, which death and divorce [are] not," said Goodman. "However, a few months' pause can allow the family to more fully appreciate and evaluate their economic situation going forward."
That said, some other experts suggested it would be good to weigh whether a pause would be in a consumer's best interest in all circumstances.
"In some cases, moving straight to a permanent solution, where you would receive some form of debt restructuring or a loan modification that would change the profile of the loan and reduce the monthly payment, that might be better," said Meg Burns, executive vice president of the Housing Policy Council, noting that death and divorce might be situations that call for this.
Moving straight to a mod in some situations could help borrowers avoid incurring more debt and depleting home equity, she said, noting that these are points the HPC has asked the Consumer Financial Protection Bureau to consider as it gathers feedback on a separate proposal to extend forbearance for more permanent use.
A pause in payments could play a constructive role in loss mitigation, said Steven Bailey, senior managing director and chief servicing officer at PennyMac.
"I think this concept of a timeout, as long as it's an appropriate period, is a good thing," Bailey said. "It allows a homeowner, maybe, to stop getting harassing calls or communications that aren't really acknowledging that both sides know that there is a problem."
Servicers and borrowers could work together on a resolution while their payments are on hold, said Bailey. Foreclosure timelines at the state level would likely have to be considered when determining the length of the forbearance period.
"Adding some amount of time in states could be a positive thing, not just for homeowners, but sometimes for investors," he said, noting that the pause could improve the chances a customer could reperform, which may benefit all these stakeholders.
