Citing the need to keep the mortgage market “working for current and future homeowners during these challenging times,” Fannie Mae and Freddie Mac will soon begin buying certain mortgages that are in forbearance.
Under the GSEs’ current policies, Fannie and Freddie do not buy loans in forbearance. But given the unprecedented rise in forbearance due to the coronavirus, the Federal Housing Finance Agency announced Wednesday that it is allowing the GSEs to buy loans that go into forbearance within the first month.
“Due to the COVID-19 pandemic, some borrowers have sought payment forbearance shortly after closing on their single-family loan and before the lender could deliver the mortgage loan to the Enterprises,” the FHFA said in a statement.
“Mortgage loans either in forbearance or delinquent are ineligible for delivery under Enterprise requirements,” the FHFA continued. “However, today’s action lifts that restriction for a limited period of time and only for mortgages meeting certain eligibility criteria. Eligible loans will also be priced to mitigate the heightened risk of loss to the Enterprises from these loans.”
The FHFA announcement doesn’t provide much detail on the “limited period of time” that this policy will be in place, nor does it specify the “certain eligibility criteria” for the loans in question.
Subsequent announcements from the GSEs, however, provided much more detail on the loans the companies will purchasing.
According to the GSEs, the companies will only be buying loans that go into forbearance after the loan closing but before the loan is sold to the GSEs. Additionally, the loans in question can be no more than one month delinquent.
Put more simply, the GSEs will only buy loans that go into forbearance within one month of the loan closing.
Beyond that, the GSEs are also only buying loans in early forbearance for one month. According to the GSEs, the policy only applies to mortgages with closing dates on or after Feb. 1, 2020 and on or before May 31, 2020, and settlement dates on or after May 1, 2020.
In other words, the GSEs will begin buying these first-payment forbearance loans on May 1, 2020 for loans with notes dated Feb. 1, 2020 through May 31, 2020.
Loans in forbearance with closing dates after May 31 will not be eligible for purchase under this new policy.
The policy also only applies to purchase loans or a “no cash-out” refinance. Cash-out refis are not eligible.
But perhaps most notable of all the policy stipulations is how much it will cost lenders to sell these loans to the GSEs.
According to the GSEs, they will charge a loan-level price adjustment of 500 basis points (5%) for loans where the borrower is a first-time homebuyer. For all other loans, the GSEs will charge 700 basis points (7%).
That means it will cost lenders either 5% or 7% of the loan’s value to sell the loan in forbearance to the GSEs.
That’s a steep cost. On a $200,000 loan to a first-time homebuyer, for example, it would cost the lender $10,000 to sell the loan, meaning the lender is losing money on that loan. And for a loan that touches the GSEs’ loan limit of $510,400, a lender could have to pay nearly $36,000 for a GSE to buy the loan.
On the other hand, the alternative would be for the lender to keep a delinquent loan on their books. This solution at least allows the lender to sell the loan and preserve some liquidity, as the FHFA noted.
“We are focused on keeping the mortgage market working for current and future homeowners during these challenging times,” FHFA Director Mark Calabria said in a statement. “Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending.”