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COVID-19 Forbearance Issues & Cash-out Considerations

Blog By

Jim Glennon

Published April 24, 2020

As you are likely aware, the prospect of borrowers becoming unemployed as a result of COVID-19 shutdowns has become a reality, but the depth of that part of this crisis has yet to be determined. Thus, the threat of loans entering forbearance is a major concern for our industry. As the agencies and aggregators gear up for an ongoing spike in forbearance requests, it is prudent for lenders to do the same. Margins and loss reserves should continually be reviewed to ensure funds are being set aside for potential repurchases and/or large price adjustments which may be assessed by agencies and investors for loans entering forbearance.

Earlier this week, Fannie Mae and Freddie Mac offered some guidance and a little relief for the sale of purchase and rate-term refinance (R/T) loans that go into forbearance after closing. While these announcements are comforting in that they limit the immediate losses incurred if a loan quickly enters forbearance, the associated fees are large. Ultimately, loans securing purchase and R/T refinance transactions that are in forbearance can be sold to the agencies, but with a 5 to 7-point price adjustment.

However, of immediate concern is the fact that cash-out (C/O) refinance loans were excluded from any guidance or relief in this area, and investors are currently reacting to this omission in various ways. Wells Fargo, for instance, will no longer purchase any conventional C/O refinance loans effective Monday, April 27, 2020, whereas PennyMac has taken a more calculated approach and posted some fees that may be imposed if a loan enters forbearance. Other investors may assume that they have already priced in the uncertainty of forbearance in their pricing back in March. Nonetheless, investors could start to enhance purchase and R/T pricing while worsening C/O pricing. Finally, there is always the possibility that investors follow Wells Fargo and Chase, which cut guidelines sharply earlier in April, and simply eliminate certain types of loan transactions. It is worth noting that investors have been giving a couple of days warning before making guideline changes effective. 

With that being said, Optimal Blue is watching this situation closely and will share more information as it becomes available. Nevertheless, we should all remain vigilant in keeping our eyes and ears open and communicate openly. In the meantime, there are some things all originators should consider:

Should I continue to originate C/O refinance loans?
With no agency relief, regardless of how loans are delivered, there is a higher risk of repurchase here than in purchase or R/T loans.

If I deliver direct to Fannie Mae or Freddie Mac, am I insulated from this issue?
It seems unlikely that the agencies will stop buying C/O refinance loans, but remember, if a C/O loan goes into forbearance prior to selling it, NO ONE will buy it, including Fannie Mae and Freddie Mac.

Should I lock new C/O refinance loans best efforts?
While locking best efforts will not insulate the seller from repurchase or other associated fees in the event of forbearance, it should lock in price basis and guideline overlays. This is a conservative, but advisable move.

Should I lock my existing pipeline of C/O refinance loans best efforts and/or open AOTs to reserve for these loans?
Again, this should lock in price basis and overlays, but won't insulate the seller from repurchase or fees if the loan goes into forbearance shortly after closing. This is a very conservative, but also a very advisable move.

At the end of the day, it is important to consider all of the risks outlined above and to fully understand the risk tolerance of your organization when deciding how to originate and sell loans in this tumultuous market. Spend some time considering these factors and discuss them with your hedge provider. And, as always, communicate often. See you out there!