MBS Highway President and CEO Barry Habib presented a bleak scenario resulting from the Federal Housing Finance Agency’s announcement Tuesday that mortgage lenders will have to cover four months of missed payments from borrowers under forbearance during the coronavirus pandemic.
In a Facebook Live with the Association of Independent Mortgage Experts, Habib warned that lenders may be incentivized to hold on to new loans and potentially ruin borrowers’ credit, unless more federal protection is enacted. He presented a scenario in which a servicer issues a loan and makes 50 basis points on the deal.
“If a loan went bad on a first-payment default because they needed forbearance or they’re gaming the system … so on a $300,000 loan, you risk losing $21,000 to make $1,500,” he said. “That isn’t a sustainable business model.”
Habib said that would require lenders to close 14 loans that do not go into forbearance for every loan that does.
“I think lenders are going say you know what, we gotta advance the payment on a good percentage of them anyway,” he said. “If we close the loan but don’t yet sell it and wait for that first payment comes in, they’re not eligible for forbearance because it’s not yet a government loan. So you wait, if collect the first payment, great, you sell it. If you don’t collect the first payment, then guess what you do? You destroy their credit and you start foreclosure proceedings almost immediately. That’s what I think is going to happen.”
FHFA addressed this to a degree on Wednesday, announcing that it will allow Fannie and Freddie to purchase some single-family mortgages in forbearance in an attempt to support the liquidity of mortgage lenders.
On Tuesday, FHFA said that mortgage servicers with Fannie and Freddie loans will have “no further obligation to advance scheduled payments” to creditors after four loan payments have been missed. In short, the announcement means the loans in forbearance due to the coronavirus can be kept in mortgage-backed security pools as long as they are in forbearance.
United Wholesale Mortgage CEO Mat Ishbia, who also was on the AIME interview, was significantly less apocalyptic about the FHFA announcement than Habib.
“Forbearance is still a tough situation. It’s better than it was two days ago,” Ishbia said. “They’ve made incremental positive steps … to put stability in the market. Stability leaves to certainty. Certainty leads to great pricing, great service.”
“Could they have done more? Absolutely. Could they have made a bigger impact? Absolutely. Are we going in the right direction? 1,000 percent.”
Ishbia said he expects regulators and policymakers to continue to work to clean up unintended consequences after initially taking significant steps to protect borrowers through the CARES Act.
The $2 trillion CARES Act comes with significant benefits for homeowners who are unable to make their mortgage payments, most notably a moratorium on foreclosures and the right to forbearance. Forbearance allows borrowers with a federally backed mortgage to put off payments for at least six months if they suffer economic hardship during the pandemic.
At issue is how lenders cover the cost of a mortgage that is in forbearance. As FHFA explains, “When a mortgage loan is in a Mortgage-Backed Security (MBS), Fannie Mae servicers are responsible for advancing the principal and interest payment regardless of borrower payments. Freddie Mac servicers, who are generally responsible for advancing scheduled interest, are only obligated to advance four months of missed borrower interest payments. Today’s instruction establishes a four-month advance obligation limit for Fannie Mae scheduled servicing for loans and servicers which is consistent with the current policy at Freddie Mac.”
FHFA said that loans that are delinquent for more than four months historically were purchased out of MBS pools by the Enterprises. The announcement Tuesday means coronavirus forbearance cases will be treated like a natural disaster and remain in the MBS pool.
The Mortgage Bankers Association reported that 5.95 percent of all loans were in forbearance by April 12 – up from 0.25 percent of loans in forbearance on March 2. The MBA estimates that the burden on lenders could range from $75 billion to $100 billion or higher if one-quarter of borrowers take advantage of forbearance for six months or longer.