Sept/Oct 2021 Reverse Mortgage Magazine

Prudential Standards The CSBS was involved in the prudential standards that came out of the 2012 national mortgage settlement stemming from the loan crisis in the late 2000s. That $25 billion settlement primarily involved the mortgage servicers for large national banks and was led by state and federal reg- ulators, Cross says. At the time, there were not a lot of non- banks in the servicing space. And prudential standards— which he defines as financial condition and financial health added to corporate governance—were instituted. In recent years, the mortgage industry has transitioned primarily to nonbank originators and servicers, and efforts have been put in place to create prudential standards for servicers. Proposed guidelines were put out for public comment last year and are being finalized this year, with implementation expected in 2022 as states adopt the policies into law, Cross says. “In 2011, 2012 and earlier, national banks were responsible for servicing, so it left little room for supervision by state regulators,” he explains. “Since then, state regulators have emerged as the primary supervisors for mortgage servicing.” He points out that nonbanks were servicing about 60 percent of mortgages and banks 40 percent by the fourth quarter of 2020. That compares to more than 70 percent for banks in the fourth quarter of 2014 and less than 30 percent for nonbanks. “Waiting for a crisis to implement standards is a risky plan,” Cross says, expressing his support of the aforementioned efforts underway to regulate servicers. Rising Numbers Cross points out that the peak for serious mortgage delinquencies was in 2009, after experiencing high numbers in 2008. The effects of the pandemic in 2020 rival those numbers. “In 2020, we are just a hair below where we were in 2008 with serious defaults,” he says, adding that means 2020 is the third highest year on record. The issues in 2020 are completely different than in 2008 and 2009, he cautions, but serious delinquencies, nevertheless, are the best indicator that foreclosures could be close behind. For example, in 2009, 68 percent of mortgages that were seriously delinquent ended up in foreclosure. “I can’t tell you this time around that of the roughly 3.5 million loans that are delinquent in 2020 that 68 percent will end up in foreclosure, but I can tell you that historically that was the result,” Cross says. “But there are differences this time around.” Back then, poorly structured mortgages led to the defaults. “This time around, the fundamentals of the mortgage market are really sound. Unemployment is low, house values are way up, interest rates are down. It is a completely different environment,” Cross says. “In fact, barring the pandemic, we wouldn’t be talking about a crisis. We would be talking about the fact that the mortgage market is looking really, really good right now. “I can’t say a high level of defaults means a high level of foreclosures,” he continues. “But we need to be concerned about that possibility.” The national foreclosure ban, which was extended to the end of July, means that his association and the CFPB expect a “tidal wave” of foreclosures this fall. The expectation is that at least 800,000 forward mortgages will be coming out of forbearance and need some assistance. “Even in a best-case scenario, a lot of borrowers will come out of forbearance and need to move toward foreclosure or put in an application for loss mitigation, which means servicers will have a ton of work to do in that area,” Cross says. “Some people will come current, but a large number will not be able to bring their loans current.” In the federally backed loan space alone, he says, $46 billion in mortgage payments were in arrears. “Not a small amount,” he says. “No matter how you cut it, we think there are going to be a large number of borrowers in need come the fall. This adds further weight to state regulators’ argument that we need tools to be supervising the mortgage servicing part of the industry.” Until now, Cross says, reverse mortgage servicers didn’t need to follow the prudential standards established after the last crisis unless they were part of a forward and reverse servicing company. But that is changing. The CSBS recognizes that the financial condition components are dramatically different between forward and reverse State Regulators continued from page 23 24 REVERSE MORTGAGE / SEPTEMBER-OCTOBER 2021