Preparing your organization for increased mortgage defaults

Not every borrower makes timely payments, payments in full or even payments at all. In these cases, servicing entities are typically required to “advance” the P&I, known as principal and interest advances, and T&I, known as escrow advances. Entities may also incur recoverable corporate advances, which are expenses the servicer paid that are recoverable from the borrower, such as bankruptcy fees, forced placed insurance and other expenses.

Further, entities may incur nonrecoverable corporate advances, or the fees that the servicer determined in its good faith business assessment will not be recovered. Many of these corporate advances (also known as foreclosure advances) are tied to the preservation and, if necessary, the liquidation of the mortgaged properties.

Complexities in servicing advances

Advances are recovered from borrowers when payments are ultimately made by the borrowers, liquidation of the property or by filing claims with the various agencies or companies that insure the loans. During the collection process, servicers incur costs associated with trying to collect the payments, the foreclosure process and ultimate sale of property in liquidation scenarios. The expenses incurred (advanced) by the servicer are due back to the servicer, which may be repaid by the borrower, investor or through liquidation.

Servicers should have controls around the appropriateness and collectability of advances and compliance with regulatory, investor and insurer guidelines. In addition to the investor and insurer guidelines, many states and counties have guidelines around what can be assessed to the borrower and minimal entitlements that the borrowers are allowed. For example, many state "and counties" have criteria “supporting what” lien release fees can be charged to the borrowers and “every state” has guidelines around foreclosure, while "some" states require minimum interest that is due on borrower escrow funds. Costs associated with bankruptcy liquidation are also complex since it’s guided by complex jurisdictional guidelines.

Forbearance and rising interest rates

With the onset of COVID-19, many governmental bodies adopted the Coronavirus Aid, Relief and Economic Stability (CARES) Act and various other programs to provide temporary relief — primarily through forbearance — to defer the need to liquidate property and to keep borrowers in their homes. Under the CARES Act, lenders and servicers were prohibited from starting a judicial or nonjudicial foreclosure judgment until March 31, 2021, which was later extended to July 31, 2021. Borrowers could request a mortgage forbearance up to 180 days and request a secondary extension of 180 days so long as the borrower experienced a financial hardship due to COVID-19. This was later extended to permit a total forbearance period of 18 months.