September 19, 2021

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Mortgage News

Mortgage Companies Are Making Money Off Your Forbearance Plan

When homeowners paused mortgage payments at the start of the Covid-19 pandemic, their mortgage companies found a way to make money.

Mortgage companies have indulgent purchases of government-sponsored mortgages and are selling those loans back to investors for a profit. The trade is made possible through a policy that aims to lighten the government’s own burden of dealing with mortgages that the homeowner does not pay.

So-called early buyout trading, an obscure but lucrative part of the mortgage business, is used by many mortgage companies, including the three largest:

Rocket cos.,

PennyMac Financial Services Inc.

PFSI 0.05%

and

Wells Fargo

WFC 0.69%

& Co. That added to what was already there a stretch banner for mortgage lending, fueled last year by refinancing and Pandemic-inspired moves to the suburbs.

Investors are eager to get their hands on these loans. Many were made a long time ago and therefore carry interest rates that are higher than the usual rate. Another attractive factor is that investors believe that many of these borrowers will fail to refinance in the short term. Refinancing harms investors because it takes out a mortgage and takes away their source of income.

As US investors buy single-family homes for rental apartments, some investors buy homes through sale-leaseback transactions that provide homeowners in trouble with a way to pay off their debts while staying in their home. However, many experts fear that they may never become a homeowner again.

This is how the early buyout trade works:
  • Typically, when a mortgage is made through the Federal Housing Administration or Department of Veterans Affairs programs, it is pooled with others in a Ginnie Mae bond. Ginnie Mae is a government mortgage company that supports the bonds that are sold to investors.
  • If that borrower stops making payments later, the Ginnie Mae rules allow the mortgage manager to buy them out of the pool at face value after 90 days. This means that the mortgage bank pays an amount equal to the unpaid principal and the interest due at the time.
  • The mortgage lender then works with the borrower to get him or her electricity back – for example, by having the homeowner make up for the defaulted payments at the end of the loan.
  • Once the borrower has resumed payments, the mortgage company sells the loan back to a new pool that the investors buy, often for more than what the mortgage company paid.

About 840,000 FHA and VA loans were tolerated that month, or 6.9% of that market, according to

Black Knight Inc.

In the twelve months through May, mortgage lenders bought approximately $ 140 billion in Ginnie Mae loans that homeowners were lenient or otherwise not paying, according to a

JPMorgan Chase

& Co. Analysis of Ginnie Mae data. About $ 94 billion more is eligible.

Now that some of those loans are working again, JPMorgan analysis showed that $ 7.8 billion was repackaged into bonds in May alone.

In normal times, this practice is intended to give mortgage companies more flexibility in handling defaulted loans – and reduce the role of the government in handling it. It also means that the mortgage lenders are no longer interested in making sure investors get paid. Otherwise, a mortgage lender is usually responsible for advancing capital and interest to investors even if the homeowner does not make payments.

Michael Drayne, acting executive vice president at Ginnie Mae, said a resilient market for buying up overdue loans makes the Ginnie Mae program as a whole more attractive. (While deferred loans are considered defaulting by investors, they should not be reported to credit bureaus as defaulting.)

When the pandemic broke out the government allowed millions of borrowers to temporarily suspend their mortgages, expanding the number of loans servicers could buy. And the market saw them as a relatively safe bet, believing that the economy would recover if homeowners had to pay again.

At the same time, some investors have complained about the buyouts because they are losing the sources of income for borrowers whose loans are no longer in the pool. That’s what made Ginnie Mae adjust the program last year.

PennyMac reported nearly $ 284 million in revenue from these acquisitions for the first three months of the year, including interest income and loan restructuring income. Compared to less than $ 48 million a year earlier.

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Rocket recently announced that its funding facility for these activities nearly doubled to nearly $ 636 million in the first quarter from the fourth quarter.

Wells Fargo bought $ 30 billion in mortgages last year where homeowners left off. A bank spokesman said buyouts had long been a normal practice, then “rose significantly in the second half of 2020” and returned to normal in 2021.

Write to Ben Eisen at [email protected]

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