As the foreclosure and eviction holds and forbearance protections are lifted, we expect a large influx in loss mitigation and bankruptcy filings. This could result in under-prepared bankruptcy departments being unable to keep up with volume. In addition, this will likely raise the cost of servicing and extend foreclosure timelines.
There are many ways that mortgage, auto, and other loan servicers can prepare for an increase in bankruptcy filings over the coming weeks, months, and, potentially, years.
Servicers should use this time to prepare for the expected uptick in bankruptcies and evaluate the following questions:
With government support programs ending, there will likely be an increase in consumer bankruptcies flowing into a bankruptcy system. What challenges will the consumer finance industry see from this influx of bankruptcies and how can they emerge and ultimately flourish?
At the onset of the global COVID-19 pandemic, the United States saw approximately 33.5 million unemployment filings over the course of less than two months. This is one component of the expected financial fallout of a multi-month impact on the American economy. Many businesses saw full or partial shutdowns leading to massive layoffs and furloughs that resulted in household wage reductions.
With multiple weeks of limited business and diminished revenue, consumer businesses such as restaurants, retail shops, movie theatres, and airlines are slowly reopening, with significant limitations. When the economy will return to pre-pandemic levels is unknown — some believe the economy may see extended impact through 2020 into 2021.
Bankruptcy filings change over time due to many external factors and are largely tied to the overall economy and employment. As you can see in Table 1, since 2011 and the end of the Great Recession, there has been a downward trend in bankruptcy filings through 2019.
Additionally, filings through March 2020 also saw a 5% drop year over year against the filings of 2019 in the same period.
There was little indication of a bankruptcy problem on the horizon, going into the second quarter of 2020. Table 2 provides the time frame from 2006 to 2017, which covers the Great Recession. The Great Recession aligns with a very significant increase in non-business bankruptcy filings. However, more localized events like natural disasters (e.g., Hurricane/Superstorm Sandy in 2012) did not have a significant national impact.
How can we use this information to plan? Unlike a natural disaster, the coronavirus has had a worldwide impact and is likely to manifest similarly to the Great Recession. There are, however, some specific distinctions in this scenario vs. the Great Recession:
Although the current economic scenario is most like the Great Recession, there are key differences that are already impacting current bankruptcy filings. Unlike the Great Recession, borrowers have benefited from CARES Act support, including forbearances, foreclosure, and evictions moratoriums, and money received from the Paycheck Protection Program. Not all areas of the country have seen housing value impacts from the pandemic. The true impacts of these programs will take a long time to understand. Are they just delaying the inevitable or will the interventions decrease the bankruptcy burden in the long term?
Servicers should be mindful of the potential for a significant increase in defaults, personal bankruptcies, and foreclosures, which will lead to the increased cost of servicing customers and higher servicing losses as we emerge from the pandemic.
Cost of Servicing Impact: Bankruptcy, foreclosure, and loss mitigation will drive increased servicing costs. Underlying challenges include:
Capacity Constraints Within Bankruptcy Departments: Current bankruptcy teams may not have experience with large volume spikes and the need to prioritize. Identifying the expected volumes in types of bankruptcy (Chapters 7, 11, or 13) may prove difficult due to unprecedented markets. Potential roadblocks may include:
Impact of Increased Servicer Losses: Delays in the bankruptcy legal process from bankruptcy through foreclosure and real-estate owned will likely increase losses by servicers. Challenges may include:
Servicers may elect to use the current downtime to think about the following:
Special thanks to Kyle Saltzberg for contributing to this article.