The New Economic Struggles of Single-Family Home Borrowers (Part 2 of 2)

With contributions by Nathan Williams

This is the second of a two-part series on the struggles that single-family home borrowers are currently facing. In our first post, we explored the economic impacts experienced by borrowers of the Single-Family Housing Guaranteed Loan Program. In this post, we discuss tools that can help mitigate these negative impacts in the future.

Sustaining Single-Family Homeownership

In the first part of this two-blog series, we introduced the mortgage recovery advances, or MRAs, implemented by the USDA’s Rural Development (RD) in mid-2021 for its Single-Family Housing Guaranteed Loan Program. In addition, we established the state of the housing market and key economic indicators, explaining how these trends negatively impact borrowers of this program. In this second part, we’ll discuss two major loss-mitigation tools the Summit team has worked with that can be used to help RD face this challenge.

Although economic fallout from the COVID-19 pandemic continues to occur, RD should take steps toward a data-driven strategy for loss mitigation derived from industry best practices. In the Summit team’s experience with RD single-family housing programs and systems, we’ve learned that being strategic in handling delinquent properties will help minimize net losses. By reducing losses on seriously delinquent properties, the rest of the portfolio will be able to thrive and keep borrowers in their homes in the long term.

We believe that RD can utilize certain tools to provide more expedient and cost-effective foreclosure and loss mitigation processes. Below, we’ll highlight two tools Summit has used to face delinquencies in the past: the Best Execution Calculator and the Loss Claims Property Sale Value Model.

The Best Execution Calculator

Summit has used our Best Execution Calculator to rank options and determine the best disposition option for seriously delinquent properties. The calculator leverages RD’s mortgage data and validated property valuation data (for example, whether the value is an interior or exterior appraisal, an automated valuation model, or a broker’s price opinion) to recommend the ideal loss mitigation strategy for each loan. The Best Execution Calculator can help RD face the increasing delinquencies caused by the COVID-19 pandemic to create an optimal disposition strategy to minimize net losses.

Summit developed the Best Execution Calculator to help minimize net losses in the event of default. From 2016 to 2020, we used the calculator to reliably value hundreds of thousands of single-family housing loan assets for auctions, bundled note sales, and balance sheet valuations. During this project, we implemented the proprietary calculator to evaluate disposition options by examining the costs and benefits of each alternative. The disposition channel yielding the highest net benefit—or lowest loss—was deemed the optimal choice.

The Loss Claims Property Sale Value Model

The Loss Claims Property Sale Value Model is the second tool Summit uses to support the USDA. This model directly improves the claim settlement process on properties, expediting the payout to the lender by forecasting future property sale values ahead of the actual sale. When a borrower defaults and the lender acquires the title to the property, RD’s Customer Service Center uses the estimated future property sale values to settle loss claim payments ahead of the property sale, potentially expediting payment to the lender by months or years. This is done through application of the model’s two primary outputs: average loan size by region and variable coefficients that are recalculated annually. These coefficients and average loan sizes are delivered to the USDA, where the future property sale values are estimated and used to calculate an optimized claim payment for the lender. This is a fair price for both the lender and the taxpayer and reduces the time to pay.

By expediting this process, it saves money and resources needed to maintain the property, as well as reduces uncertainty regarding the amount and timing of the claim payment. Without this tool, claim payments can cost the taxpayer significantly more. This also frees up time for RD staff, allowing them to focus on higher priorities, such as home retention options for borrowers.

Conclusion

In this two-part series, we focused on a group of borrowers who have seen a direct impact from the changes the COVID-19 pandemic brought to the economy. The United States has shifted from an expansionary fiscal policy designed to fight a recession to considering raising interest rates, which would put the brakes on inflation in an economy of rapidly expanding money supply. Identifying how these borrowers are struggling in this economy, and what factors contribute to the cause, can help agencies like the USDA better mitigate losses and keep borrowers from defaulting.

The Loss Claims Model and the Best Execution Calculator both address the increasing delinquencies in complementary ways. One focuses on minimizing the USDA’s losses in the case of default, and the other helps speed up the process and focus on higher-value priorities. Ongoing use of these tools is more durable than onetime mortgage recovery advances, as their outputs can be implemented on a consistent basis. Given the current economic outlook, the emphasis on loss-mitigation instruments for the future of programs like the Single-Family Housing Guaranteed Loan Program is more important now than ever.

Photo by Jordan Opel on Unsplash