A growing chorus of mortgage servicers, consultants, and lobbyists support the idea of having forbearance programs as a permanent solution in the industry’s loss mitigation toolkit, rather than only a temporary relief for wide-scale events such as financial crises and pandemics.
“Whether it is a natural disaster, a job loss, or an illness, forbearance is wildly effective,” John Lawrence, executive vice president of the Texas-based servicer Selene Finance, said last week during the Mortgage Bankers Association (MBA) Servicing Conference in Orlando.
Susan Allen, head of product at Experian Information Solutions, agreed: “There are a number of situations where it works really well. I certainly hope it’s here to stay, along with other programs.”
Forbearance allows homeowners to defer mortgage loan monthly payments due to financial hardships, remaining in their homes. The relief, not available under normal circumstances, was implemented through the Cares Act due to the Covid-19 pandemic.
The programs were offered before the loss mitigation “waterfall,” which provides tiers of assistance to help borrowers pay their mortgage. Homeowners with mortgages from Fannie Mae, Freddie Mac, or government agencies such as the Federal Housing Administration (FHA) suffering a financial hardship could defer payments up to 18 months.
The previous experience with forbearance programs, during the Great Recession, was not positive, according to executives. Borrowers had challenges accessing payment relief and the rules changed multiple times.
This time, however, forbearance programs have been considered a success by avoiding a foreclosure crisis in the country. According to the MBA, these plans reached more than four million homeowners last year but declined to 650,000 as of January 31.
“We still have a significant number of customers that are on forbearance. So, it may start to come down. But this is going to become infinitely more complex,” said David Sheeler, executive vice president of correspondent lending and servicing finance at Freedom Mortgage Lending.
The industry believes that a permanent forbearance solution should come under different rules.
During the Covid-19 crisis, forbearances were easily accessible to borrowers. Lenders and servicers did not require complete documentation to prove financial hardship to qualify their customers to the program. Homeowners’ assertion that they were suffering from such hardship was enough.
Critically, during the pandemic, a share of borrowers in forbearance kept paying their mortgage loans monthly. MBA’s data revealed that, during the last 19 months, 19.3% of forbearance exits represented borrowers who continued to make payments. However, executives in the industry defend that a permanent version should be implemented with some documentation, so forbearance plans can reach those who need the relief.
Another aspect to consider is the impact of forbearance plans on servicers and lenders. Amid the urgency to help borrowers, the Cares Act brought risks to these companies. For example, the liquidity pressure placed as they have to pay investors, insurers, and taxing authorities on loans in forbearance, regardless of whether the borrower actually makes those payments.
Rocket Companies, parent company of Rocket Mortgage, said that while Fannie Mae and Freddie Mac issued guidance limiting the number of payments a servicer must advance in the case of a forbearance, they expect that a borrower who has experienced a loss of employment or a reduction of income may not repay the forborne payments at the end of the forbearance period.
“We have so far successfully utilized prepayments and mortgage payoffs from other clients to fund principal and interest advances relating to forborne loans. However, there is no assurance that we will be successful in doing so in the coming months and we will ultimately have to replace such funds with our cash, including borrowings under our debt agreements, to make the payments required under our servicing operation,” the company said in its 10-K document filed in the U.S. Securities and Exchange Commission (SEC).
Rocket reported that approximately 0.8% of its serviced loans were in forbearance as of Dec. 31. Rocket was the number three issuer of Ginnie Mae-insured mortgages in February, originating $3.5 billion in volume across 15,000 loans.
California-based lender and servicer Pennymac also noted similar potential liquidity challenges in its 10K document. According to Pennymac’s public statements, prepayment activity has thus far been sufficient, however, prepayment activity in the future may be insufficient to cover required principal and interest advances.
“Servicing advances resulting from the COVID-19 pandemic could have a significant adverse impact on our cash flows and could also have a detrimental effect on our business and financial condition,” the company said in its 10K. As of December 31, 1.3% of loans in Pennymac’s predominantly government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent.
Servicers also support that forbearance programs should be shorter under a permanent version, with an efficient exit for borrowers who did not recover their income during the forbearance period.
“Forbearance, traditionally, is a tool for short-term, but we are using it now for 18 months, or even more. It was never really designed for that,” a mortgage lobbyist told HousingWire. “We have to find an effective way also for borrowers to exit forbearance, hopefully not through foreclosure or short sale.”
The FHA is working on expanding the COVID-19 loss mitigation program to include the option of a 40-year loan modification with a partial claim, an acknowledgment that some borrowers exiting forbearance are still facing financial challenges. The alternative, which can help borrowers during the pandemic, may become part of the FHA’s standard modification protocols.