How the Homeowner Assistance Fund may affect foreclosures

The Treasury’s Homeowner Assistance Fund could go a long way toward reducing foreclosures as they slowly restart — depending on when it arrives and how it’s distributed.

The most optimistic estimates from Black Knight suggest the nearly $10 billion in American Rescue Plan Act funds could pay for 30% of the increase in missing mortgage principal-and-interest payments since the pandemic began, with variations by state.

But when and how the money will actually be used — and who gets it — depends on how fast state plans materialize. They are due for submission to the Treasury by a recently extended and flexible Aug. 20 deadline, which presents a conundrum for servicers as loan workouts get underway in the next few weeks.

“The timing is complicated because you have customers rolling off forbearance, ready for help, but the state program might not be up and running,” said Dana Dillard, principal at consultancy Housing Finance Strategies and a former mortgage servicing executive.

Funds could start rolling out when forbearance expirations spike
Depending on how quickly it’s processed and what the screening process for it is like, HAF money — which was a part of the COVID-19 relief package passed by Congress in March of this year — could start rolling out some time after the summer ends.

“Assuming timely receipt, review and approval of the states’ plans by the Treasury, we expect programs will be up and running this fall,” said Stockton Williams, executive director of the National Council of State Housing Agencies.

If money distributed through these programs arrives in the next couple months, it could coincide with a period starting in September, in which Black Knight estimates servicers could be processing 18,000 forbearance exits per day. But the uncertainty of when the funds will be available makes them difficult to account for in the course of imminent workouts.

"The funds and programs are not really rolled out yet, and the distress and emergence from forbearance is happening in large numbers in September and October. So we are a bit behind in...understanding the options at the state level," said Faith Schwartz, founder and principal at Housing Finance Strategies. "However, the state funds will be a welcome and helpful stopgap for consumers who are not fully engaged with the loan servicers or failing to qualify for...loss mitigation. These funds can avoid foreclosures and help those most in need."

The slow phase-in of foreclosure starts may be helpful in preserving the effectiveness of HAF funds, even if they don’t arrive immediately.

“Foreclosure moratoria technically are ending or have ended, but it’s a layered restart. Abandoned properties and foreclosures initiated pre-pandemic will be the first ones done,” noted Mike Rawls, CEO of Xome, a Mr. Cooper affiliate.

Starting Aug. 31, pandemic-related foreclosures will be limited to abandoned properties and borrowers who have not responded to outreach for 120 days under Regulation X rules for servicers. That gives states time to roll out relief money before foreclosure risk for people with pandemic-related hardships begins in earnest next year.

“It’s an important gating piece within the rules for servicers,” said Matt Douglas, a vice president at the Housing Policy Council. “Housing Assistance Fund dollars are only available to those who became seriously delinquent after the pandemic began, and Reg X prohibitions are the same.”

A test case for how money may be distributed
However, not all HAF money will go toward foreclosure prevention. While that’s one permitted use, it’ll likely be used for homeowners’ insurance and utility payments as well.

The New Mexico Mortgage Finance Authority, for example, has been testing two HAF programs. One provides relief to borrowers who have missed mortgage or property tax payments and another provides funding for emergency roof repairs, said Rebecca Velarde, NMMFA’s senior director of policy and planning.

States have been authorized to use up to 10% of their money for start-up costs and testing in preparation for drawing up official plans, and New Mexico was one of the first to do so.

“In New Mexico and a lot of the rural areas we have very old housing stock,” Velarde said, explaining why the state wanted to customize its test program.

In the state’s pilot program mortgage relief has been going directly to servicers, who have been helping with outreach to homeowners. Like all HAF money, the funds went to borrowers with the greatest need as defined by low- to moderate-income metrics. In the case of the roof assistance, “extremely low” incomes were targeted.

While the state’s pilot has custom criteria, it also utilizes some proposed standards for data-sets and agreements. These have included a proposed common data file, template for third-party authorizations, and servicer-state collaboration agreement that were available from industry groups, Velarde said.

Hardest Hit Fund, forbearance outreach are servicer guideposts for HAF
The National Council of State Housing Agencies, Housing Policy Council and their members have submitted templates, which are updated versions of some previously used in conjunction with the Hardest Hit Fund, to the Treasury for review as part of an effort to make HAF distribution more efficient. HHF was a homeowner assistance program distributed through the states in the wake of the Great Recession.

Housing groups are also redeploying networking and outreach methods used to spread the word about pandemic-related payment suspension programs to ensure the money is received broadly and quickly enough to head off as many pandemic-related foreclosures as possible.

“We’re rerouting our campaign for hard-to-reach borrowers and letting them know there are state resources available,” said Schwartz, who has also been working with Dillard to lead a forbearance-awareness advertising effort called, “Not OK? That’s OK,” in conjunction with a public-private housing coalition.

The campaign tested a wide range of outreach, from billboards to online advertising, with social media and email drawing the strongest responses, she said. Industry groups confirmed that they hope to use a similar campaign to help the states spread awareness of HAF money.

“We hope to have [messaging] ready for our members, that they could easily download and incorporate either through social media or on their websites,” said Sara Singhas, director of loan administration at the Mortgage Bankers Association.

However, it’s ultimately up to each state to distribute the funds and handle the screening process for distribution, so any amplification of their messaging servicers take part in should be equitable and accurate, Douglas suggested.

“The best practice may be to tell all delinquent borrowers that these resources are out there, and what the criteria are,” he said.