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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 24 April 2023 C O V E R F E A T U R E people navigate the continuing economic challenges we're seeing? We have learned a variety of lessons, some of which were mainly confirming information that we had learned during the financial crisis. Here are a few things that I think are core lessons. First, alignment across channels and collaboration among those channels in responding to a crisis is absolutely critical. FHA was very fast off the blocks when the pandemic hit, and then there was a lot of coordination among FHA, VA, and USDA, as well as Fannie Mae and Freddie Mac. That coordination sent a clear signal to the public. The CARES Act forbear- ance option was understandable. For the most part, it didn't depend on who owned your mortgage. Another thing that this experience demonstrated was that getting assistance to borrowers quickly and without a lot of paperwork and back and forth is critically important. There has always been an overly heavy focus on the moral hazard of assist- ing a borrower who hasn't jumped through multiple hoops to explain how deserving they are of this assistance. But the fact is, if you look at crisis after crisis, there is no history of the typical troubled borrower gaming the system. We saw that at work with the forbearances, and then we saw that at work with the COVID-19 waterfall of loss mitigation solutions. When you take out the extensive and onerous paperwork, you can get assistance to people quickly, and it is as effective as doing it the other way. We also confirmed what research had shown after the financial crisis: the fac- tor that is most important for borrower success—meaning a borrower who goes delinquent, comes back to re-performing status, and stays there—is the level of monthly payment reduction that we're able to provide. Now, the pandemic was different from 2008 because of the very quick and severe dislocation we experienced economi- cally and socially. We had households take advantage of the forbearance opportunity even when they didn't necessarily know if they would need it, but they were taking it to take one form of anxiety off their plate while they dealt with all the other forms of anxiety. So, there were borrowers who didn't need that payment reduction when they came back into performance. When borrowers are ready to restart their mortgages, the servicer first finds out if they can continue to make the monthly payments they were making before. Then we put the arrearages into a second lien and the borrower pays what they were paying before. That works for people who ended up in the same job or at the same income level and just had that moment of uncertainty when the world came to a halt. But for people who did lose their jobs or experienced health effects resulting in disability or even death for somebody in their household or paying for the increased childcare expenses that everybody had to incur, for those folks, we provided additional options for them to get a monthly payment reduction, again in a streamlined way. This is why I think our performance has been so good in helping people bring their mortgage payment cur- rent. Finally, the highly intensive dialogue between FHA, the other channels, and the servicers was extremely useful and marked a significant difference from what happened at the beginning of the financial crisis in 2008. That dialogue included not just the government entities and the servicers but also the consumer advocates. There are strong relationships among all those parties. There are regular channels for communica- tion; there are personal relationships across the different sectors. All of that fed into what was ultimately a great deal of success with the mortgage-related response to the pandemic. Q: You also recently announced a reduction in mortgage insurance premiums on FHA mortgages, estimated to save people an average of about $800 annually. Could you speak about what led to this decision and why now was the right time for this change? We were very excited to be able to make this change. As the industry had noticed, our capital reserve ratio, which is required to be over 2%, had crept up over time to more than 11% by the end of fiscal year 2022. What that meant was that FHA was in a very strong financial position, and as the underlying mortgage market changed—in particular, when we saw that very steep rise in interest rates—we started thinking "What can we do to help aspiring homeowners get into the market, even in the face of these higher rates?" Even though FHA was already quite strong coming into 2020, there was too much uncertainty about the pandemic to make a change in the premium at that time. Today, while we still have a higher number of delinquent borrowers than we would have in a perfect world, we have a good sense of "When you take out the extensive and onerous paperwork, you can get assistance to people quickly, and it is as effective as doing it the other way."