Larry Goldstone is tired of being ghosted. He is used to it by now, but the problem has only gotten worse since the beginning of the COVID-19 pandemic. Goldstone has tried contact via phone calls and emails consistently. If necessary, he even knocks on doors — without success.
He has talked openly about it but is still trying to understand the reasons and potential solutions. Goldstone’s case is not related to the world of bad Tinder dates, where the colloquial term “ghosting” is popularly used when someone cuts off contact without warning or explanation. Goldstone is an executive at a mortgage servicer company trying to reach out to homeowners.
“We know who the borrowers are. We service their loans. We have their email addresses. We have their phone numbers. We know where they live. But we’re having a hard time reaching out to them,” he said during a panel at the annual Residential Mortgage Servicing Rights Forum held in New York City in October.
Servicers, lenders and investors dealt with a tsunami of 7.7 million forbearance programs throughout the COVID-19 pandemic, reaching 1.5% of the U.S. population. Most homeowners who stopped their mortgage payments have successfully arranged a graceful exit from forbearance. In general, servicing executives are relieved not to have to re-live another foreclosure crisis. But there will be some fallout. And for the hardest cases, the biggest problem for servicers right now is simply establishing communication with them.
Over the course of three months, HousingWire interviewed about a dozen servicers, housing counselors, academics and lawyers to drill down on how big the ghosting problem is, why it happens, and what the consequences could be for both borrower and servicer.
An army of door-knockers
Goldstone, who is president of Capital Markets & Lending at BSI Financial Services, estimates that between 20% to 25% of borrowers in BSI’s servicing portfolio have been non-communicative, he told HousingWire. Consequently, they built an additional foreclosure and loss mitigation capability, added staff and rethought processes to contact borrowers.
The company serves a $50 billion loan portfolio. Investment firms that purchase mortgage loans in default also face the same challenge. Bill Bymel, managing director at Spurs Capital, an investment manager specializing in distressed mortgages, said that about 15% of the overall portfolio during the pandemic contained non-communicative borrowers, up 50% compared to the same pool of borrowers pre-COVID.
One reason homeowners have not responded to the company was the foreclosure moratorium that went into effect in March 2020.
“Without any enforcement action on the foreclosure side, it has opened up a new level of borrowers’ belief that they can just kick the can down the road and ignore the problem,” Bymel said.
According to Bymel, the situation began to change as a key Dec. 31 deadline neared, the date by which the Consumer Financial Protection Bureau (CFPB) rules stipulate that servicers redouble their efforts to work with borrowers to prevent avoidable foreclosures. Borrowers started to reach out knowing that foreclosure processes would soon resume, said Bymel.
Another Bymel business, First Lien Capital, a mortgage and real estate investment platform, is increasing the number of workers who knock on doors and negotiate with homeowners due to the lack of communication via phone or email.
“We would normally have about 150 people nationwide, and we are probably going to have about 200 people knocking on doors looking for solutions,” Bymel said.
The reasons for the lack of communication between borrowers and servicers are numerous. Ellie Pepper, deputy director at the National Housing Resource Center (NHRC), an advocate for the nonprofit housing counseling industry, said the past still looms large for many borrowers. Some are especially haunted by the Great Recession between 2008 and 2011.
“Borrowers had different interactions with their servicers, and some ended up not really trusting their servicers,” she said. “Servicers are under different rules and are trying to be more open to interacting with borrowers in a better way. But the bottom line is that homeowners are scarred.”
Besides fear and lack of trust, Pepper said it may sometimes be difficult for homeowners to understand mortgage terms, particularly if English is not their native language, so they avoid contacting their servicers. To Dana Dillard, principal advisor at Housing Finance Strategies and a 25-year mortgage industry veteran, the ghosting problem happens, among other reasons, because homeowners deny the reality or feel overwhelmed with their debts — especially if they lost a relative or friend due to COVID-19 or are unemployed for a while.
Jackie Boies, senior director in partner relations at credit counseling consultancy firm Money Management International, said that people fear talking with their mortgage servicers because they have never had to speak to them before in many cases.
“When the pandemic hit, and they put their loan into forbearance, it was quite easy. Most servicers allow you to go online and just sign up for a plan. And now to exit it, if you are not somebody who is just returning and paying it all in full, it is a little scary.”
The latest Black Knight data show that there were still about 1 million active forbearance plans in October. Among over 6 million borrowers who exited the plans, 76% performed or paid off their debt. Another 7% were in loss mitigation plans, 3% were delinquent and less than 1% were in foreclosure — the three categories accounted for 854,000 homeowners in aggregate.
“That’s what you’re seeing: a huge drop in forbearances as people are being forced off, but some borrowers are not responding to their servicers,” said Matthew Tully, vice president of agency affairs and compliance at servicing SaaS Sagent. Tully said that homeowners are “putting their heads in the sand,” not realizing that the foreclosure moratorium went away, and servicers can begin foreclosure operations throughout the country.
The situation is more delicate for servicers focused on loans with Ginnie Mae guarantees. In this case, the share of borrowers in loss mitigation plans, delinquent or foreclosure increased to 16% in September (or 411,000 homeowners), according to Black Knight data shared with HousingWire.
For example, with Federal Housing Administration (FHA) loans, 1.5 million homeowners became delinquent and entered forbearance between March 2020 and November 2021, the end of the fiscal year. In November, 387,488 homeowners were still in forbearance, and 79% of them were seriously delinquent.
The FHA has a total portfolio of 660,000 seriously delinquent loans. According to mortgage analytics firm Recursion Companies, Freedom Mortgage had the highest number of COVID-related forbearance plans for Ginnie Mae loans, with 41,204 in total in October. The company said the share of borrowers ghosting them is a minority, but declined to provide a figure.
“When customers are behind on their mortgage, they are concerned, and they don’t know exactly what to do,” said David Sheeler, executive vice president of correspondent lending and servicing finance at Freedom Mortgage. “We certainly have had some challenges. But I think, for the most part, being very proactive in sharing the message around what’s available to customers [after forbearance] has helped.”
Servicers are looking for different ways to connect with borrowers. Pepper, from the NHRC, mentioned that they are working with the U.S. Department of Housing and Urban Development approved housing counseling agencies to do more effective outreach to some of the harder-to-reach borrowers.
Dillard, from Housing Finance Strategies, recommended that servicers work with nonprofit organizations, community leaders and other trusted partners in areas where the problem is more evident.
“We’re going to have a small pocket of customers who still need our help [after forbearance plans expire],” she said. “I do think it’s a small share of them, but it’s challenging, and it is time-consuming for servicers.”
Ghosting doesn’t bring many practical consequences in the dating world. Ghostees and ghosters can move on with their lives after interrupting romantic texts and sweet dates. In complete silence, they deal with their own internalized emotional conflicts.
It is not that simple when the relationship is between mortgage servicers and borrowers. Failures in communicating and finding a solution for a mortgage loan in default can lead, in the worst-case scenario, to foreclosure. That is exactly what millions of forbearance plans and a federal moratorium were designed to avoid during the pandemic.
But in 2022 these safeguards are not in place anymore, forcing companies and homeowners to face the problem. A caveat: A backlog of foreclosures from the last two years will make the process longer and more expensive.
During the pandemic, the CARES Act banned foreclosures for 16 months — from March 2020 through July 2021 — to protect homeowners experiencing financial hardship. Also, servicers were not allowed to execute a foreclosure-related eviction until September 2021.
The rules were only applied for federally backed mortgages, about 75% of all mortgages. But to simplify their operations, servicers voluntarily offered the safeguard for all borrowers, not only those who had loans guaranteed by government agencies, such as Fannie Mae and Freddie Mac. These agencies also took additional steps to limit mortgage defaults and foreclosures, expanding repayment options through December 2021.
Who’s afraid of the CFPB?
After the federal foreclosure moratorium expired in July, the Consumer Financial Protection Bureau (CFPB) launched rules limiting foreclosures through Dec. 31. Servicers had to give borrowers a meaningful opportunity to pursue affordable loss mitigation options quickly and without exhaustive paperwork.
One of the options was a deferral: resuming regular payments but moving missed bills to the end of the mortgage. Another possibility consisted of changing rates, principal balance or length of the mortgage via a loan modiﬁ cation. In addition, homeowners could sell their homes if they had sufficient equity.
But according to the CFPB, foreclosures could start for borrowers who were more than 120 days behind on their mortgage before March 1, 2020, more than 120 days behind and had not responded for 90 days (the ghosting cases), or evaluated for all mitigation options without success.
Servicers, afraid of CFPB enforcement actions, were resistant to start new foreclosures until the rules expired, according to industry executives and lawyers. The moratorium kept new monthly foreclosures cases artificially low at 7,132, on average, between March 2020 and July 2021, down from 28,877 before the pandemic, according to a report from ATTOM Data Solutions.
But new cases increased when the federal moratorium ended, from 6,572 in July to 10,471 in November, the latest data available. Still, monthly foreclosures were half the pre-pandemic levels.
“We anticipate seeing an uptick in foreclosure activity in the first quarter, partly because the CFPB rules will have expired, partly because there is always an uptick after the holidays,” Rick Sharga, executive vice president at RealtyTrac, said to HousingWire.
He follows, “We expect to see another uptick, probably late summer, as servicers will have gone through all of the loss mitigation options with borrowers who have been delinquent and not been able to get back on track. But we don’t expect to see normal levels of foreclosure activity until late in the year.”
Sharga’s worst-case scenario predicts foreclosures at 1.5% of total loans in the next 12 to 18 months, which would change if another recession happened. To compare, according to the Mortgage Bankers Association (MBA) data, new foreclosure cases were at 0.8% of total loans before the pandemic, after achieving almost 5% during the Great Recession.
Federal laws aren’t the only ones servicers have to contend with. States also launched new rules to prevent foreclosures during the pandemic. The National Consumer Law Center (NCLC) identified executive declarations and court orders in 34 states as of April 2021. Some states have imposed a moratorium after the federal safeguard ended in July.
In Oregon, the deadline was Dec. 31, 2021. New York banned residential and commercial foreclosures until Jan. 15, 2022. According to Geoff Walsh, staff attorney at the National Consumer Law Center (NCLC), some states hadn’t reacted to the pandemic and created more restrictions to foreclosures, such as Oregon and New York, because they hadn’t seen new cases — as servicers were afraid of the CFPB rules.
“Each state has the authority to implement laws for servicers to review borrowers’ situations before foreclosure, and I expect states to strengthen their laws,” Walsh said. Foreclosure rules change according to where the borrower lives.
For example, Alabama, California and Texas are administrative foreclosure states, which means the process will take less time because it does not need to go through a judicial process. In this group, states with the shortest average foreclosure timelines in the third quarter of 2021 were Montana (94 days) and Wyoming (102 days), according to ATTOM.
Judicial states such as Florida, New Jersey and Connecticut require a court decision, which means that the process can take years. The ATTOM data shows that the judicial states with the most extended average foreclosure timelines were Kansas (1,901 days) and New York (1,659 days).
Due to the COVID-19 pandemic, foreclosure processes have become longer. Properties foreclosed across the country were in the process an average of 924 days in the third quarter of 2021, up from 830 in the same period of 2020.
“We already know that government staff were low, to begin with. A lot of people left work and didn’t come back during COVID. Now we’re going to need more staff to deal with the backlog of foreclosures coming down the pipe,” Bymel, at Spurs Capital, said.
Bymel expects a timeline extension between 12 and 18 months in states with judicial foreclosures. Because the timeline is longer, Bymel said the cost of a foreclosure process will increase for servicers and investors.
“I usually figure a cost between 4% to 5% of the loan balance per year to property taxes, insurance, legal, servicer, inspections, in the judicial states, and between 2% and 3% in administrative states.” Sharga, from RealtyTrac, said that he expects that states will bring retired judges back to handle foreclosures, as happened during the Great Recession.
“But, coming out of a pandemic, the general feeling is to do everything you can to protect the homeowner from losing a house because a lot of these people probably wouldn’t be losing a house except for the pandemic. So, I don’t expect to see a lot of activity in courts or in the legal system to accelerate the foreclosure process.”
This article was first featured in the February HousingWire Magazine issue. To read the full issue, go here.