One of the breathtaking statistics to come out of the coronavirus pandemic is the sheer number of U.S. homeowners who have requested mortgage forbearance. As of mid-May 2020, more than 4.2 million homeowners had entered plans to postpone their payments, or about 8.4% of all U.S. mortgages, according to the Mortgage Bankers Association (MBA).
With so many Americans temporarily discontinuing their mortgage payments all at once, the ripple effects were already being felt across the mortgage industry. Unintended consequences are sure to emerge in the coming months.
Forbearance has long been a tool for lenders to work with homeowners who are experiencing hardship. Congress, in its coronavirus aid package passed in March 2020, allowed homeowners to request forbearance on federally backed mortgages for 180 days, with an option to extend it by an additional 180 days. The bill did not require homeowners to provide proof of hardship.
Initially, there was confusion over how payments would eventually resume. Some homeowners and even some mortgage industry professionals believed that a lump sum would be required at the end of the forbearance period.
Federal regulators later clarified that there were a variety of ways to handle this — including tacking the missed payments onto the end of the loan term, making a balloon payment at the end of the loan or modifying the terms of the original loan. Regulators also loosened rules on when borrowers can refinance, whether they are currently in forbearance or they wish to refinance after forbearance ends.
In the short term, forbearance puts pressure on mortgage servicers. This was true even after the Federal Housing Finance Agency (FHFA) limited to four months the number of payments that servicers must make on loans in forbearance, says Sara Singhas, MBA’s director of loan administration.
“Certainly, it’s not as big an issue when you’re talking about the really, really big institutions, but [with] much of the community banks, the regional [banks] and others, it’s really uncertain right now,” Singhas says. “Unless there’s another way to help offset these advancing obligations, then it’s going to be very, very challenging.”
Although FHFA allowed Fannie Mae and Freddie Mac to purchase loans in forbearance, the Fed also was allowing the government-sponsored enterprises (GSEs) to charge lenders 5% to 7% of the loan balance. Some loan programs, including cash-out refinances, dried up almost immediately as banks and mortgage companies tightened lending standards, says Scott Olson, executive director of the Community Home Lenders Association (CHLA).
That’s unfortunate, Olson says, because tapping equity through a cash-out refi could help homeowners get through the current crisis. His organization suggested that forbearances on future loans should only be allowed if the borrower can document a pandemic-related financial hardship.
“We understand that the coronavirus sort of gobsmacked the economy and borrowers, but for people taking out new loans, I think that there’s something that’s going to have to be done to deal with it,” Olson says.
As of late May 2020, CHLA was recommending changes to the Fed’s approach. First, it says the Fed should provide mortgage servicers — particularly small to midsized independent mortgage banks — liquidity to handle loans in forbearance so they can continue lending across the market.
Second, the organization urged Fannie and Freddie to forgo heavy fees when purchasing loans in forbearance. The GSEs have generated billions of dollars through mortgage fees on U.S. taxpayers over the past decade, and Olson says it’s time that the GSEs return the favor to support the mortgage market.
In the coming months as people return to work, mortgage servicers will face the complicated task of working with millions of borrowers on plans to resume payments. It’ll take a lot of effort to work with every individual circumstance.
The Milken Institute raises the specter that some (or maybe many) borrowers may not be able to resume payments after the forbearance period ends. The institute recommended that the private-label residential mortgage-backed security industry needs to work together to prevent “disagreements, errors, and litigation that arise from differing contractual interpretations and competing priorities.”
Since Fannie and Freddie are taking in so many loans in forbearance, analysts also are speculating whether the plan to privatize the GSEs will get pushed back. In the meantime, while banks and mortgage companies have been facing challenges, they also have been fortunate because haven’t suffered like the airline, restaurant and hospitality industries, Olson says.
“Because [interest] rates are so low, they’re doing a lot of loans,” Olson says. “Unlike a lot of businesses that are just on their heels, mortgage businesses have chunked along here. It has kept going and business has been brisk.”
One advantage is that rules put in place after the Great Recession added protections for consumers and tightened underwriting standards, Singhas says. The mortgage industry also has had experience granting large-scale forbearances after natural disasters, including Hurricane Harvey, which ravaged Texas and Louisiana in 2017.
“You have stronger, safer loans and the borrowers are better fitting the loans that they can afford now,” Singhas said.