Will higher interest rates put your delinquent borrowers in jeopardy? Pushed to new lows on the cusp of the financial crisis, the average annual interest rate for mortgages stayed under five percent for 12 years, lasting from 2010 until 2022, when the average annual rate climbed to 5.53 percent. Rising above seven percent in October of 2022 and then above eight percent in October of 2023, where do we sit today? Amidst mixed predictions for the continued direction of interest rates, Bankrate clocked the average interest rate for April of 2024 at 7.05 percent. With the vast majority of homeowners holding mortgages with an interest rate well below this mark, are mortgage servicers ready to help the current borrower who faces default?
Basic Interest Rate Math Tells a Story
Notwithstanding, there is a more complex concern for homeowners facing default. Many borrowers who bought homes back when interest rates were hovering around three and four percent have chosen to stay in those homes. Subsequently, as we grapple with an unstable economy and interest rates that have doubled, we now face a rising increase in the mortgage delinquency rate. The Mortgage Bankers Association’s National Delinquency Survey reported a 38 basis point increase in first-quarter delinquencies compared to last year. The climb in delinquencies, bankruptcies, and foreclosures, albeit currently moderate, warrants close attention as existing loss mitigation options may not be relevant and are ripe for change. Are you ready?
Have You Been Waiting for Another Catalyst to Change?
If you’ve been waiting for the next servicing obstacle to drive change in your servicing operation, this may be it. The question is, do you have the right technological solutions for the current growing population of delinquent borrowers? Today’s delinquent homeowner more than likely has an existing mortgage interest rate that is significantly less than the current market rate. This eliminates existing benefits and qualification for modification options that rely on interest rate payment reduction to achieve a lower affordable payment and/or roll in arrearages. Although many homeowners have seen an increase in equity, once they become delinquent, today’s higher interest rates preclude them from qualifying for home equity lines of credit, second mortgages, and even many loss mitigation programs. Is the industry ready to support this new picture of default, and more importantly, do mortgage servicing systems have the flexibility needed to facilitate additional loss mitigation waterfall requirements, derive increasingly complex data aggregation and dissemination, perform more comprehensive eligibility calculations, and expand on the already extensive loss mitigation documentation set?
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Introducing a Different Approach to Loss Mitigation
The U.S. Department of Housing and Urban Development (HUD) recently introduced its Payment Supplement program to assist Federal Housing Administration (FHA) borrowers in default without consideration of interest rates. Different from options that modify the homeowner’s existing mortgage by leveraging interest rate spreads, the FHA Payment Supplement program does not alter first mortgage terms. Instead, the qualifying borrower is able to access Partial Claim monies to temporarily cover part of their mortgage payment, thus providing relief. As with any new program, rapid implementation can inadvertently create greater harm than benefit. Here are the implementation and impact highlights of Mortgagee Letter 2024-02 for consideration as you explore this offering:
What is the FHA Payment Supplement Program?
- Available May 1, 2024, through a Payment Supplement Agreement (PSA), this HUD loss mitigation option will be mandatory as of January 1, 2025.
- Have you developed an implementation plan for the Payment Supplement program?
- Have you developed an implementation plan for the Payment Supplement program?
- This loss mitigation option is available to defaulting borrowers who have not already exercised all Partial Claim options.
- Are you able to immediately access Partial Claim status and utilization at the loan level?
- Are you able to immediately access Partial Claim status and utilization at the loan level?
- A PSA can lower the principal and interest portion of a mortgage payment by up to 25 percent for borrowers facing imminent default.
- Can your existing processes segment mortgage payment components for real-time eligibility calculations?
- Can your existing processes segment mortgage payment components for real-time eligibility calculations?
- Mortgage servicers utilize a Partial Claim to offer a Payment Supplement to borrowers in default.
- Can your existing systems readily sustain the introduction of a new Partial Claim operation?
- Can your existing systems readily sustain the introduction of a new Partial Claim operation?
- Starting with the unpaid principal balance (UPB) at the time of initial Partial Claim, or if there was no previous Partial Claim, the UPB as of the Date of Default, borrowers can access up to 30 percent of their (UPB), net any previous Partial Claims.
- Are you able to extract required data, complete required calculations, and push resulting eligibility determination through system workflows, processing, and document generation?
- Are you able to extract required data, complete required calculations, and push resulting eligibility determination through system workflows, processing, and document generation?
- Servicers must then calculate the total amount needed to bring the mortgage current and subtract this from available Partial Claim funds to determine the Monthly Principal Reduction (MoPR) payment.
- Can you accurately track mortgage payment and fee accounting, and is it fully integrated with servicing operational processes for use in MoPR and Partial Claim computations?
- Can you accurately track mortgage payment and fee accounting, and is it fully integrated with servicing operational processes for use in MoPR and Partial Claim computations?
- The lesser of 25 percent of the monthly principal and interest payment, and the principal only portion of the payment as of the beginning date of the Payment Supplement period, is multiplied by 36 months to calculate three years of maximum MoPR.
- Can your systems maintain all calculations necessary for real-time program eligibility determination?
- Can your systems maintain all calculations necessary for real-time program eligibility determination?
- The temporary monthly payment obligation is equal to the entire principal, interest, taxes, and insurance (PITI) amount plus any other servicer advances, less the MoPR.
- Are servicing advances tracked in detail, and is this data readily accessible and updated for automated computation?
- Are servicing advances tracked in detail, and is this data readily accessible and updated for automated computation?
- The Payment Supplement is not a modification but is a temporary mortgage payment reduction to principal for a period of up to three years.
- Do your systems support multiple payment tracks, both temporary and permanent?
- Do your systems support multiple payment tracks, both temporary and permanent?
- Applying applicable Partial Claim monies, a zero-interest subordinate lien between HUD and the borrower is created by the PSA. It is enforceable and legally binding through a Payment Supplement Note and security instrument.
- Can you manage multiple layers of security documents, ensuring accuracy, availability, and access to embedded data?
- Can you manage multiple layers of security documents, ensuring accuracy, availability, and access to embedded data?
- This subordinate lien is serviced separately by HUD and is paid off at time of refinance or sale of the property.
- Are your processes that support third parties effectively integrated, and does communication flow to and from these parties as data changes and/or events occur?
Can You Answer ‘Yes’ to the Italicized Questions Above?
If not, then it’s past time to innovate your approach to servicing operations and ready your organization for a successful implementation. This is where process automation with CLARIFIRE® makes a real difference in how you do business. Powering servicing necessitates using smart, flexible automation that is inherently proficient in assimilating data from multiple sources, completing complex logical calculations, determining optimized eligibility, and intelligent document processing. With these capabilities and more, we will make your implementation of FHA’s new Payment Supplement program a rapid success. Whether you’re a large, mid-sized, or small servicer, CLARIFIRE® is the modern process automation solution. Offering proven technology that positions your organization to provide continued and enhanced relief to distressed borrowers, we work with you collaboratively to tackle yet another phase of industry perseverance. Experience the power of real-time seamless servicing automation and intelligence with CLARIFIRE®. Visit us at eClarifire.com, and we will show you how CLARIFIRE® is truly BRIGHTER AUTOMATION®.
Jane has applied her vast experience (over 25 years) operating process-driven businesses to successfully redefine client-focused service. Jane has worked with expert programmers to apply cutting-edge web-based technology to automate complex processes in industries such as Financial Services, Healthcare and enterprise workflow. Her vision confirms Clarifire's trajectory as a successful, scaling, Software-as-a-Service (SaaS) provider. A University of South Florida graduate, Jane has received many awards related to her entrepreneurial skills.
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