The co-founder and CEO of a so-called “tech-enabled residential mortgage servicer” named Valon (formerly Peach Street) has warned we could be on the brink of another foreclosure crisis.
While real estate is flying high at the moment, it’s appears that two very different stories are unfolding at the same exact time.
On the one hand, the housing market has never been hotter, with supply at record lows and dwindling, while demand from prospective buyers skyrockets.
Meanwhile, home builders are playing catch-up, which has pushed property values to all-time highs, with a further 10% increase expected in 2021.
Then there’s the other story, which got some press early last spring when the pandemic took hold, but has since been somewhat ignored.
Nearly 3 Million Homeowners Have Their Mortgage Payments on Hold
- Currently 2.7 million borrowers are taking part in COVID-19 mortgage forbearance
- These programs essentially put payments on hold for up to 360 days
- But once the forbearance ends the borrower must at least resume regular payments
- This could lead to another wave of short sales and foreclosures if the economy doesn’t get back on track
There are 2.7 million U.S. homeowners in mortgage forbearance plans at the moment, which represents 5.38% of loan servicers’ portfolio volume, per the latest weekly report from the MBA.
These borrowers essentially have their payments on hold for up to 360 days due to a COVID-19-related issue, such as unemployment or reduced earnings.
It’s even worse for government-backed loans like FHA loans and VA loans, with the Ginnie Mae forbearance rate at 7.61%.
Simply put, there are millions of existing homeowners unable to make payments, and scores of prospective buyers unable to land a property due to supply constraints.
At some point, these two stories will merge, and it could land us right back in another foreclosure crisis, similar to what was seen back in 2008.
What Happens When the Mortgage Forbearance Runs Out?
- Using a conservative estimate of 20% of borrowers in forbearance falling into foreclosure
- We would be back at 2008 levels with a 1.8% foreclosure rate across all housing
- This could lead to another downturn similar to what was experienced a decade ago
- But better loan servicing and more efficient loss mitigation has the potential to curtail some of this negative activity
One thing that should concern any homeowner, prospective home buyer, and loan servicer (the entity that collects monthly payments) is what happens post-forbearance.
While there are a variety of solutions to pay back the forbearance, such as a partial claim or payment deferral, most expect the homeowner to resume regular payments.
That means they won’t necessarily have to pay back the missed payments right away (no lump sum necessary), but they’ll at least have to get back to making regular monthly payments.
If they’re unable to do that, possibly due to a shuttered small business or long-term unemployment (or COVID-19 illness), they may be offered a loan modification plan.
But for some, the reality is going to be the loss of the property, either via a short sale, deed-in-lieu of foreclosure, or straight up foreclosure.
Valon co-founder and CEO Andrew Wang told me that the “forbearance and foreclosure moratoriums were a temporary fix,” and that the “stockpiling of forbearance and foreclosures will come to a head when these leniencies are lifted.”
While he does believe government efforts can help us avoid a full-scale industry-wide crisis, there’s still a good chance many Americans will lose their homes.
He expects “some in the forbearance pool will be OK,” but others will need to “move to liquidation scenarios – nearly all of which requires a homebuyer to leave their home.”
That means another wave of short sales and foreclosures, similar to what was seen about a decade ago when home prices plummeted during the Great Recession.
“Even if a conservative 20% of the current loans in forbearance move forward as foreclosures, we’ll be back at that level,” he added, noting the comparison to the 1.8% foreclosure rate for all housing in 2008.
Disrupting the Stale Loan Servicer Model
- Valon says the largest mortgage servicing software controls more than half of all U.S. residential loans
- This effective monopoly has apparently driven servicing costs up nearly 250% in the past decade
- Their mobile-first cloud driven platform can reduce costs and improve borrower’s access to loan information
- A more empowered borrower working with a more efficient servicer could reduce foreclosures and help us avoid another crisis
So you might be wondering how Valon can help us avoid another foreclosure crisis?
Well, their mission is essentially to disrupt the stale loan servicing industry, which like all parts of the home loan process, was in dire need of a refresh.
Their mobile-first mortgage servicing software that is built in the cloud (Google Cloud specifically) can reduce servicing costs by 50% and increase borrower self-service capabilities.
These features include improved access to their home loan information and the ability to make payments from wherever they are using a simple interface.
They also believe their tech can eliminate lengthy paper-intensive processes associated with loss mitigation and potentially keep more Americans in their homes.
After all, there are lots of borrowers who never even know they have options to avoid foreclosure simply because of poor (or no) communication from their loan servicer.
And when you think about how much time a homeowner spends with their loan servicer (potentially the entire loan term) vs. their lender (a month or so), you realize the importance of getting it right.
Valon just raised $50 million in Series A Funding, led by Andreessen Horowitz, and gained Fannie Mae approval to service agency-backed residential mortgages.
They will use the proceeds to acquire more mortgage servicing rights (MSR), with commitments already in place to grow to roughly $10 billion in servicing volume this year.
Valon operates in 49 states, and expects to add New York to the fold later this year.
Not only do they think they can reduce servicing costs, which can in turn pass savings onto consumers, they believe a technology-enabled alternative can keep borrowers better informed.
And a better-informed borrower may know just that little bit more to actually keep their home, thereby helping us all avoid another full-scale crisis.
ANYTHING to get prices to break and reset!!! Average selling prices in my area are up just about 22% in 3 years! It’s damn near impossible to buy a house and even new home builders are pricing “entry” level or first homes at $300k and above… and I do not live in any kind of big city like Seattle or anything.