Lenders, Forbearances, Risk, and Mobile Technology

By David Chiappe, JD., President, SharperLending Mortgage Technology

Smart phone powered property inspection solutions are used by banks and credit unions to safely and securely gather current property condition data through a mobile device.  Lending departments can request that the homeowner or member collect interior and/or exterior property data – such as photos and descriptions – and then transfer this information to the lender to complete an evaluation. 

The mobile nature of these inspection solutions promotes speed and efficiency while helping lenders evaluate the property condition as they consider their portfolio risk.

As with any new technology, possible applications continue to be discovered as to how and where it can best benefit lenders. One niche area in lending where smart phone powered property inspections may benefit lenders is in the growth of forbearances and possible accommodations for loans. 

Forbearances and their ugly distant cousin: defaults

Mortgages that are in forbearance have dropped a small percentage, but more are forecasted according to most lending industry pundits.  While the three credit bureaus report that forbearance numbers leveled off in July after a spike in spring, the numbers they are reporting are still quite high.  As federal rules and payment flexibilities potentially expire, the question that’s on our financial industry minds is: what are the chances that borrowers will be able to bring their loans current?  Or perhaps a more pertinent but sobering question is: will there be an increase in defaults in 2021? 

Before we can answer this, let us evaluate the forbearance situation with a 2021 mindset.

As loans go into forbearance (or some sort of possible modification), we all know that it’s common for those months of non-payment to not be forgiven.  Instead, the terms are extended.  So instead of a mortgage loan maturing in 360 months, it may be 363, or 366 months. 

This is helpful for consumers that are furloughed or temporarily unemployed due to COVID-19 closures of businesses, but many of those jobs may not be available again.  Economists are looking at the long view and the possibility of extended unemployment.  In the west and in our area, we are sadly seeing locally owned businesses struggling to keep their doors open.  As the possibility of those jobs going away permanently increases, loans in forbearance become difficult to satisfy.

Portfolio Loans

Historically speaking, banks and credit unions may portfolio a larger percentage of the loans they make compared to other types of lending and financial institutions.  As loans are portfolioed and serviced, lenders may want to ask themselves how many loans in their portfolio have accounts in forbearance.  If we can make the logic leap that accounts in forbearance may be a pre-default or pre-foreclosure indicator, conservative lenders may want to take a look at the credit reports of those borrowers to gauge the risk potential in their portfolio.  After all, lenders are not in the property ownership business, and they likely do not want to get blindsided if potential becomes reality and they end up owning more property than they are used to.

Potential REO Properties and Property Conditions

In lending, the condition of the property that is used as collateral to secure the loan will always be of utmost importance: at the beginning, and especially at the time where payments are deferred, modified, late, or in some other default or pre-foreclosure status.

How can you safely keep track of the condition of the property so you know what’s happening inside and outside?  You can try a smart phone powered property inspection solution.

To guard against portfolio risk, this is where we are seeing possibilities for substantial benefit in using smart phone powered property inspection solutions.  If there are accounts in some stage of forbearance on loans in your portfolio, lending departments can deploy these property inspection solutions to know exactly what the current condition of the interior of the property is. 

What we at SharperLending are hearing…

The GSEs have extended their moratorium on foreclosures until at least August 31st, 2020.  State and local governments have delayed defaults as well to help consumers.  Mortgage payments don’t have to be made right now, but they will still be due.  The 3 credit bureaus have stated that they expect an increase in defaults.  Their models are showing elevated levels of consumer accounts/tradelines in some form of forbearance, modification, delinquency, or default.  One important fact to note here is that the CARES Act doesn’t allow loans in forbearance to be reported as delinquent, late or anything but current. 

While data models are pointing toward default increase as somewhat of an inevitability, they predict that this will not be as severe as the 2008-2009 financial crisis.

To answer the original question of “will there be an increase in defaults in 2021?”  We believe the answer is: most certainly.   

What can lenders do?  

We are not lawyers and cannot give advice.  We can report to you on what we are seeing and try and help provide potential solutions. 

  • If you portfolio loans, evaluate your portfolio risk.
  • Repull consumers’ credit reports on loans in your portfolio.
  • On the credit report, review the data and check for accounts in forbearance.
  • Consider the number of accounts that are being reported as in forbearance.
  • Deploy a mobile property inspection solution that leverages smart phone technology, so you know the condition of the properties in your portfolio.

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