The Federal Housing Finance Agency (FHFA) has announced that it will allow Fannie Mae and Freddie Mac to buy certain mortgages that go into forbearance within the first month — but lenders will have to pay a steep loan-level price adjustment fee.
The new directive is a departure from standard operating procedure for the government-sponsored enterprises (GSEs), which don’t normally buy loans in forbearance. But due to economic hardship from the ongoing COVID-19 outbreak, some borrowers have sought forbearance not long after closing on their mortgage, slamming the window for lenders to deliver their loans to the GSEs shut. With forbearance numbers rising by the day, the FHFA decided to temporarily allow the practice to help keep the mortgage industry liquid.
“We are focused on keeping the mortgage market working for current and future homeowners during these challenging times,” said Mark Calabria, director of the FHFA. “Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending.”
Neither Calabria nor the FHFA has yet specified how long the new policy will remain in effect. According to guide bulletins from Fannie and Freddie, however, it will only apply to loans with closing dates between Feb. 1 and May 31, 2020, and settlement dates on or after May 1.
As for the criteria required to make a forborne loan eligible for GSE purchase, the GSE bulletins elucidate that the loan must be either a purchase or no cash-out refinance mortgage and must be no more than 30 days delinquent. Borrowers must be approved for forbearance plans based on COVID-19 related financial hardship that occurred after the loan’s note date, and only loans that went into forbearance after the closing date, but before they were sold to GSEs, will be qualified for purchase.
Perhaps most controversial among the conditions for GSE purchase, however, are the loan-level price adjustments attached to selling the loans in the first place. According to Freddie Mac’s bulletin, mortgages in forbearance will be subject to a credit fee of 5% of the loan’s value if the borrower is a first-time homebuyer, and 7% otherwise.
If for example, a first-time buyer’s loan totals $245,320 — an average first-time purchase amount, according to Urban Institute — that’s a pricey fee of $12,266 for the lender to pay to sell the loan to a GSE.
Scott Olson, executive director of the Community Home Lenders Association, blasted the fees as “punitive” despite the mortgages being properly underwritten at the time of closing.
“The response today by Fannie Mae and Freddie Mac and FHFA to borrowers going into forbearance on GSE loans in the wake of the COVID-19 crisis is totally inadequate,” said Olson. “Instead of providing a lifeline to conventional lenders and the borrowers they serve — as Congress and the Administration have done for almost all other sectors of the economy — today’s announcement amounts to little more than a GSE willingness to be a lender of last resort, a player in the scratch-and-dent market.”
The CHLA had sent a letter to Calabria, Fannie Mae and Freddie Mac last week urging the GSEs to consider purchasing forborne loans for as long as the federal forbearance option created via the CARES (Coronavirus Aid, Relief, and Economic Security) Act remained in place. But the loan-level adjustment stipulation, Olson said, effectively negates the federal forbearance option in the first place.
“Some party — either Fannie Mae and Freddie Mac or Congress — should step up and support properly underwritten loans where the borrower then loses their job,” he said. “And if they fail to do so, the conventional loan market will suffer until the coronavirus crisis is over.
“In the end, it is consumers that are the big losers here — because if Fannie or Freddie effectively won’t buy a loan in this situation, the borrower is not legally eligible for forbearance under the CARES Act.”