While some in the housing industry are expecting mortgage delinquencies to climb to 20% or more due to the impact of the coronavirus, Federal Housing Finance Agency Director Mark Calabria said he feels the figure will be much lower than that.
In fact, Calabria bristles at those who are projecting widespread delinquencies and forbearance, and especially those who claim that the provisions of the CARES Act create a situation where borrowers can take a one-year “mortgage holiday” without any proof of hardship or repercussions.
“Unfortunately, I think there’s been a lot of misperception and miscommunication out there,” Calabria told HousingWire this week.
“I think as you know, this isn’t a holiday. Everybody’s not eligible,” Calabria continued. “You have to have had a job income loss. Your expectation is that you’re getting unemployment insurance; that’s going to be counted towards your income. I’ve seen some of the commentary on this, it’s just bizarre. This is not a ‘nobody has to pay their mortgage anymore’ situation.”
Some of the commentary surrounding the CARES Act –– under which homeowners with federally backed mortgages can request forbearance for as many as 12 months –– is that the wording of the bill is so vague that borrowers may think they can skip their mortgage payments for a full year.
“What was passed in the CARES act is about 90% of what we had announced weeks before,” Calabria said, referring to the March announcements from Fannie Mae and Freddie Mac that borrowers may be eligible for a forbearance plan of up to 12 months.
“So, the parameters of who’s eligible: you lost your job, you had a decline in income, things like unemployment insurance count for income,” Calabria said. “And that’s been the case for almost a month now. Three weeks, at least.”
According to Calabria, some observers are misunderstanding and/or misconstruing the text of the bill and creating confusion.
“I hear this commentary out there that says everybody gets a year. That’s not true,” Calabria said. “I hear this commentary that you get a minimum of six months. That’s not true. So again, I would actually argue that not that much has changed. And I’ve seen again, I’m not calling out names. I’ve just seen a number of commentators who should know better, who have the capacity to read the details and know that’s not what’s going to happen. Unfortunately, it sounds like you got people out there yelling ‘fire’ in a theater.”
For the record, the CARES Act stipulates the following on forbearance:
(1) IN GENERAL.—During the covered period, a borrower with a Federally backed mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID–19 emergency may request forbearance on the Federally backed mortgage loan, regardless of delinquency status, by — (A) submitting a request to the borrower’s servicer; and (B) affirming that the borrower is experiencing a financial hardship during the COVID–19 emergency.
(2) DURATION OF FORBEARANCE.—Upon a request by a borrower for forbearance under paragraph (1), such forbearance shall be granted for up to 180 days, and shall be extended for an additional period of up to 180 days at the request of the borrower, provided that, at the borrower’s request, either the initial or extended period of forbearance may be shortened.
(3) ACCRUAL OF INTEREST OR FEES.—During a period of forbearance described in this subsection, no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract, shall accrue on the borrower’s account.
According to Calabria, some people are interpreting the phrase “up to 180 days” in the text of the bill to mean that forbearance is automatically 180 days or more.
And Calabria said that those who claim that borrowers will claim forbearance without any actual hardship are misguided.
“It just seems utterly irresponsible to me,” Calabria said.
Beyond the issues surrounding the interpretation of the CARES Act, Calabria also believes that mortgage delinquencies and forbearance requests will be much less than many are expecting.
According to Calabria, so far, less than 2% of the borrowers who have a GSE mortgage have requested forbearance. And while Calabria expects that figure to rise, he doesn’t think that percentage will hit double digits.
“We don’t see any expectation of that in the Fannie, Freddie book,” Calabria said. “We’re not seeing any scenario where we think the take up rate at Fannie and Freddie is going to be 30%. We’re just not seeing that.”
Calabria said his current expectation is that approximately one million GSE mortgages will be in forbearance by May. For perspective, the GSEs currently have approximately 28 million single-family loans in their combined portfolio.
If one million GSE borrowers did go into forbearance, that would represent approximately 3.6% of the GSEs’ portfolio, much less than the double-digit figures some are projecting.
“We don’t know what the world’s going to look like in three to four months,” Calabria said. “But, these kind of 30, 40, 50% take up rates, for a year…that just doesn’t strike me at all as anywhere near what we’re seeing.”
Another reason Calabria doesn’t believe there will be a massive spike in delinquencies is the underlying strength of the GSEs’ mortgage portfolio in the lead-up to this crisis.
“We’re going off the data. We’re going off of the expectations that we think are here. Again, there are certainly some unknowns,” Calabria said.
“I’d be the first to say, and I say this is as an economist, I don’t know anybody’s forecast of house prices I put much weight on now,” Calabria said. “But it’s important to keep in mind going into this crisis, less than 1% of Fannie and Freddie’s book were loans that were underwater. So, unless we see really big declines in house prices going forward, you’re going have borrowers in forbearance who have substantial equity, by and large.”
According to Calabria, a combination of loss of income and declining house prices would drive delinquencies up, but Calabria states that the country is not experiencing that yet.
“This isn’t like the Great Recession. Remember 40-some percent of job losses in the Great Recession were either directly or indirectly related to housing,” Calabria said.
“We know that construction workers are going to work again. So, this isn’t some situation where you’re a carpenter in 2008 and you don’t know whether you’re going to get business again for years,” Calabria said. “It’s just a very different situation.”
But when asked about the recent record-breaking totals of job losses, Calabria noted that in previous recessions, high numbers of job losses didn’t directly correlate to increases in delinquency.
“During the Great Recession, I believe job losses were somewhere on the order of eight to nine million. Were foreclosures eight to nine million? Not even close,” Calabria said.
“Or you go back to 2001, the dot com bubble. I think the job losses were somewhere on the order of five to six million. Yet, you saw very modest changes in delinquency,” Calabria continued.
“People walk away when they lose their job and they have negative equity,” Calabria added. “Until we see a situation of declining house prices, which I’m not saying is impossible. But we’re not seeing it now.”
Calabria stated that the expectation is that the country will be able to return to normal once this crisis abates, leading to people going back to work, which would enable them to continue paying their mortgage on time.
“We’ve been looking back at what happened last time. What happened in 2001. What happened in the early 90’s,” Calabria said.
“And again, you just don’t see these kinds of spikes in delinquency unless you’ve got both job loss and negative equity widespread. We’re not seeing that today,” Calabria added. “Now, I’m not saying that can’t happen six months, a year from now, but we have to be making decisions based on the real-world data received. And that’s what we’re doing.”