29 May, 2020
Published May 29, 2020
As we head into June, it feels like the eye of the storm in the mortgage industry. Forbearances are still increasing but at a greatly diminished rate, rates are still low, volume is still high, many states have begun to reopen, and the secondary market has started to stabilize. It is not until July that borrowers will start leaving forbearance and it is important to know the options available to them. Therefore, if you service any loans or were caught with some in forbearance and did not take the haircut offered by Fannie Mae or Freddie Mac, it’s time to start thinking about reperforming those loans if possible and being able to offer guidance to borrowers exiting forbearance that may begin searching for a mortgage.
First, a reminder of what exactly forbearance means for those that might not be familiar. Forbearance is a temporary decrease of payment of the loan, up to 100%. Typically, the full amount forborne is due at the end of the forbearance term. Forbearance was mandated to be an option for any borrower of a federally backed loan1 that was directly or indirectly impacted by the COVID-19 pandemic.
The FHFA has also released guidance as to when borrowers will be eligible for obtaining a new loan if they were in forbearance, either through refinance or purchase. If they continued to make payments in full or reinstate their mortgage, they become immediately eligible for a new loan without penalty. Homeowners that need to utilize a repayment play, deferral, or modification are eligible three months after their forbearance ends and they have made three consecutive payments under their new terms. The borrowers exiting forbearance may be looking to find new work, get a cash-out refinance, or even potentially extend their term to lower their payments.
There are several pathways out of forbearance, including some new options announced on May 13, 2020 by the FHFA. Let’s take a look each of these options that are available to borrowers and how each might impact servicers in the order they should be assessed, according to the FHFA.
Repay the total forborne amount at the end of the forbearance term, returning to current status. There is some debate over how helpful forbearance is if this is the primary path out and back to a regular performing status, as those able to execute this option may not have needed forbearance in the first place. This would also mean that servicers would recover their advances and servicing fees immediately upon reinstatement.
This option has a slightly higher payment than standard PITI for a period of time, while one pays down the forborne amount. The burning question here is how much documentation will be required and/or allowed to show that a borrower can or cannot make increased payments on a payment plan. This would also mean that servicers would recover their advances and servicing fees gradually over the period of the repayment plan.
COVID-19 PAYMENT DEFERRAL
Recently announced by the FHFA, the COVID-19 Payment Deferral plan would result in a non-interest-bearing balloon payment at the conclusion of mortgage (I.E., the earliest of either the: mortgage maturity due date, mortgage payoff date, or transfer/sale of mortgaged premises). The deferral can be up to 12 months of payments, including escrow. It is also worth noting that the longer the borrower is in forbearance, the less likely they are to be able to manage reinstatement or a repayment plan, making this plan more of a probable choice.
There are criteria to meet eligibility requirements:
- The borrower must have a resolved COVID-19 hardship, be capable of continuing to make the existing contractual monthly mortgage payment and be unable to afford a repayment plan or full reinstatement of the mortgage.
- The mortgage must have been current or less than 31 days delinquent as of March 1, 2020 and be 31 or more days delinquent but less than or equal to 360 days delinquent as of the date of evaluation. In this case, payments not made while in forbearance are considered delinquent.
This would also mean that servicers would not recover their advances and servicing fees until the conclusion of the mortgage. A side effect of this option will likely be increased durations due to the balloon being another barrier to overcome before refinancing becomes a smart financial decision.
COVID-19 STREAMLINED FLEX MODIFICATION
If the borrower has not resolved the COVID-19 hardship or fails to meet the other requirements for a deferral, they may be eligible for a COVID-19 Streamlined Flex Modification. However, the borrower still must have been current or less than 31 days delinquent as of the March 13, 2020. This modification reworks the terms of the loan, often extending the term and lowering the interest rate to better enable the borrower to repay. The servicer does NOT need documentation of a borrower’s hardship in this case. This is considered a “middle ground” between the repayment plans and the deferral options.
For the COVID-19 Streamlined Flex Modification, the recovery of advances and servicing fees is likely dependent on the servicing agreement. There is an additional cash outlay required to buy the loan out of the security. After it has been successfully modified, it can then be re-securitized as a performing loan and the servicer is able to keep the gain on sale2.
DELINQUENCY & POSSIBLE FORECLOSURE
It is possible that none of the above pathways out of forbearance are suitable, in which case, the amount naturally comes due and the loan would become delinquent. This is most likely for loans that started the pandemic delinquent because the borrower was already in an unfavorable position when the pandemic began, and the more beneficial (to the borrower) paths out of forbearance have been closed off due to the starting delinquency status gateway. It is likely that these borrowers will take advantage of the full 12 months of forbearance and there may be a rash of defaults and foreclosures starting in Q2 of 2021, depending on local foreclosure timelines, as these loans start coming off of forbearance into extreme delinquency.
For loans in this scenario, the only real remaining loss mitigation options outside of standard foreclosure and liquidation of the property are:
- Standard short sale: Sell the property for less than what is owed, but more than would be gained through foreclosure.
- Standard deed-in-lieu of foreclosure: Give up the collateral instead of fighting the foreclosure.
There is some hope here! If the housing market starts to open back up and pricing is strong, perhaps those that were delinquent at the beginning of the pandemic take the forbearance period as an opportunity to sell the home, saving both their credit and equity in the process. While it may be painful advice to give and/or hear, it is advice that could end up being very beneficial to someone’s life and being good for business. Upon final conclusion of the mortgage, the servicer is usually able to recover advances and servicing fees, assuming that the liquidation sale funds are sufficient to cover the advances.
To conclude, it is important to remember that this is an FHFA specified waterfall for how a borrower should be guided out of forbearance and ideally back to performing status. Servicers or those that were “caught” with loans in forbearance and unable to sell them3 are strongly encouraged not to attempt to game the system, as it is almost certain that the FHFA and CFPB will take a hard look at how all of this is resolved.
Sources & References
|||Fannie Mae, Freddie Mac, or Ginnie Mae.|
|||For subservicers see the applicable subservicing agreement.|
||| For a period of time, no one was buying loans in forbearance and then FNMA and FHLMC began buying purchase and rate/term refinance mortgages in forbearance for a 5–7 percent haircut. Some still may not consider that a reasonable market. There is still almost no market for cash-out refinance mortgages in forbearance.