April 17, 2021

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Mortgage News

The mounting costs of protracted mortgage forbearance

Banks and mortgage service providers anticipated an avalanche of loan modification requests as federal mortgage foreboding regulations were announced last year. But the further the deadline goes, the greater the write-offs that banks and service providers have to swallow.

The FHFA’s decision last month to move on expand Forbearance relief through September 2021 – borrowers with federally insured loans have a total of 18 months to make mortgage payments – has messed up the response of mortgage service providers. The expansion of forbearance has also turned the investor loss account on its head and further exacerbated racial disparities.

“We budgeted for these loans in September 2020, then December 2020, and now March 2021, and we’re moving the date forward,” said Tom Millon, CEO of Computershare Loan Services, a third-party mortgage company. “It won’t be a small task to modify these borrowers.”

Servicers say it is unclear how many of the 2.7 million or so borrowers currently in leniency will be able to make mortgage payments again after the pandemic ends.

The forbearance extension helps many low-income and minority borrowers with loans that are supported by the federal housing administration. However, non-bank mortgage servants are particularly hard hit as they continue to have to make payments on behalf of borrowers for an extended period of time.

“Servicers are just overcrowded,” said Scott Buchta, director of fixed income strategy at Brean Capital. “It is very time consuming to service non-performing loans and no one has been staffed to deal with this level of arrears. The Forbearance Expansion continues.” have a significant impact on non-banking service providers. “

With Congressional relief, borrowers in forbearance plans can defer mortgage payments with no additional fees, typically by extending the life of a loan and tackling the missed payments until the end of the loan. FHA loan borrowers had to be lenient prior to June 2020 to receive an additional three month extension.

The hope is that those borrowers who have lost their jobs will return to work and make mortgage payments again. But many borrowers who are currently in forbearance will need loan modifications that reduce principal and interest rates by 20% to 30% to be successful, experts said.

“The big question is how all these servicers are going to handle all of these requests. What are you going to do? “Said Larry Cordell, senior vice president of risk assessment, data analysis and research for the Federal Reserve Bank of Philadelphia.

The Philadelphia Fed valued in a recent study Those 20% to 30% payment cuts would cost anywhere from $ 11 billion to $ 33 billion for all borrowers currently in forbearance. Investors would bear significant costs from interest rate cuts and capital deferrals, which lead to interest losses, according to the study.

However, these calculations are a worst-case scenario – at least some borrowers will resume their payments. The last financial crisis prepared most service providers for long-term solutions to protect borrowers in their homes and from foreclosure. Additionally, unlike the 2008 real estate crisis, most borrowers have significant equity and could sell their homes to an incredibly strong real estate market to cover the missed payments.

“If borrowers can get their jobs back and their incomes recover, it will be a much better situation for the borrower,” Cordell said.

About 18% of the loans currently included in forbearance plans could become current by adding payments to the end of the loan, according to the Fed study.

“It can be so simple that the borrower missed a year worth of payments and then – boom! – Put that at the end of the loan term. That’s the easy way to do it, ”said Millon.

The big concern is that roughly 80% of indulgent loans would need a rate cut to make payment affordable, while another 2% would need a combination of term extension, rate cut and capital advancement, the Fed noted.

The Deviation from Forbearance can be even more complicated depending on the type of Forbearance loans that come out. Fannie and Freddie allow a homeowner to refinance with three consecutive post-forbearance payments – loans held by private mortgage-backed security investors or held on a bank balance sheet may not be as easy to refinance.

“For those who have lost their jobs, refinancing is simply not an option. So being lenient is far better than getting caught up in crime, ”said Xudong An, assistant vice president of oversight, regulation and credit for the Philadelphia Federal Reserve Bank.

FHA servicers hit hard

When a borrower ceases to make mortgage payments, their servicer is contractually required to make principal and interest payments to investors on their behalf. Servicers have reserves to cover these advances on loans supported by Fannie Mae, Freddie Mac, or Ginnie Mae. Ginnie guarantees investors timely payments on loans that are backed by the FHA, the U.S. Department of Veterans, the U.S. Department of Agriculture’s rural housing program, and public and Indian housing, primarily serving low and middle income homeowners.

Currently, non-bank service providers dominate the FHA and VA loan market. That’s a problem because Ginnie doesn’t reimburse the servicers directly for advances when a loan defaults. Instead, the servicer has to buy the loan from the securitized pool to stop paying the advances, which requires even more cash.

This year, many non-banks – including Lakeview Loan Servicing and PennyMac Corp. – Increased purchases of criminal FHA loans, following in the footsteps of banks like Wells Fargo and US Bank, which started buying distressed mortgages last year.

Banks have led the way in buying Ginnie pool loans after the loans were in arrears for 90 days, an approach banks like Wells have taken over the past few years and throughout the pandemic.

“Non-banks opportunistically buy up loans when a borrower reaches the end of the grace period with the hope of securitizing those loans at a profit later,” Buchta said. “The challenge will be what to do with the borrowers who haven’t made a mortgage in 18 months and how to get them back on track.”

In February, Lakeview, a third-party company based in Coral Gables, Fla., Bought $ 1.9 billion in criminal FHA loans from Ginnie Pools, bringing the total amount of criminal FHA loans to 17, according to Ginnie of Brean Capital, Lowered $ 9 billion. The buyouts also include VA, USDA, and PIH loans.

PennyMac, a large Westlake Village, Calif. Mortgage lender and service provider, bought $ 1.2 billion in loans that were 90 days past due in February and increased the total loan amount by 17.5 billion, according to Brean U.S. dollar.

In the past six months, Lakeview and Pennymac have purchased approximately $ 15 billion and $ 9 billion in Ginnie pool loans, respectively.

Many service providers credit the Department of Housing and Urban Development with creating a wider range of options to help both distressed borrowers and service providers. Once a borrower leaves forbearance, the servicer can offer what is known as an optimized loan modification, refinancing, or partial entitlement where the servicer is reimbursed for missed payments by filing a claim to HUD.

Servicers generally could not file an insurance claim with HUD until after they excluded a borrower and discovered a loss from the liquidation of the property. With HUD, servicers can now get their advances back as soon as the borrower can resume their old monthly payments. Disaster-related partial claims were first introduced after hurricanes hit Texas, Florida and Puerto Rico in 2017.

Servicers with loans backed by Fannie and Freddie are not as affected by the forbearance extensions, as they only have to push forward four months of interest and the government-sponsored businesses take the bill afterward.

When the pandemic first hit a year in March 2020, many borrowers became lenient and then found they could not refinance. Some continued to pay while indulgent. The Philly Fed estimated that seven million loans were indulged in the last eight months of 2020.

Low-income households and minority households were significantly more likely to be lenient. While this helps with payment difficulties, the Philly Fed noted that the pandemic has significantly exacerbated the racial and income disparities in the mortgage market.

“Before the pandemic, there was very little race or income disparity in terms of mortgage payment, and what happened was that the pandemic really made this whole thing worse,” Cordell said.

But while leniency is difficult for servicers and banks, it is better than the alternative, An said. The Philadelphia Fed newspaper estimated that more than 2.5 million borrowers who did not immediately take advantage of forbearance turned into criminals. Some of those 2.5 million later petitioned for indulgence, but they could have avoided all crime by doing so sooner.

Some borrowers have shown no indulgence for not getting it well and others thought they would have to repay all the missed payments at once, which is a misunderstanding, ”An said. “Foreclosure is a painful and costly process, and I hope that over time more people will realize that forbearance is an option.”