About one in 12 mortgage borrowers in the U.S. have sought a time-out on their monthly payments because of the pandemic, a helping hand made available for up to a year under the CARES Act.
But a third of the 4.1 million borrowers who have requested a “forbearance” agreement, as they are known, have remained current on their payments.
Whether they sought the agreements “just in case,” got into one accidentally or found a way to scrape up the money to prevent delinquency, those borrowers could complicate efforts to refinance or take out a new mortgage, something federal officials are trying to head off.
“Those who are making their payments should be treated as current when it comes to refinancing their loans,” Mark Calabria, director of the Federal Housing Finance Agency said Tuesday during a webinar hosted by the Mortgage Bankers Association.
Although the CARES Act requires servicers to report mortgages in forbearance as “current,” HousingWire reported last week that some borrowers had notes attached to their credit reports saying their accounts were in forbearance, the equivalent of having a scarlet letter stamped on them.
In the past, a forbearance would prevent a borrower from obtaining another government-backed mortgage for up to a year. But the federal government has stepped in, reducing the waiting period to three months, and allowing guarantors like Freddie Mac and Fannie Mae to refinance borrowers who sought forbearance.
Calabria said that mercy should also be extended to borrowers who take a month or two off and quickly catch up on payments. Whether lenders, who are tightening credit standards, hold the same attitude remains to be seen.
About two-thirds of borrowers who have sought forbearance have loan-to-value ratios of 70% or lower. That means home prices on those properties could fall by 30% and lenders could still come out whole, reducing the impact on the government-sponsored agencies who would otherwise be on the hook for losses.
“As long as we retain a situation where borrowers have a considerable amount of equity, we will be alright,” said Calabria.
Compared to other states, mortgage borrowers in Colorado entered the downturn in a stronger financial position. Colorado ranks 46th for mortgage delinquencies, at 2.46%, and 44th lowest in foreclosures at 0.28%, according to the MBA. Mississippi, by contrast, had a delinquency rate nearly three times as high, at 7.43%.
Servicers, who collect mortgage payments and forward them on to investors who own the underlying mortgage securities, are on the hook for covering up to four months of skipped payments when a loan goes into forbearance.
Assuming the $500 million worth of payments in forbearance a month they are covering doesn’t substantially increase, that works out to $2 billion, Calabria said. Many servicers have gone out and raised money to cover shortfalls, he said. And the Federal Reserve is providing liquidity to those who need it.
As more states have opened up, demand for mortgages to purchase homes has rebounded. Historically low interest rates, at 3.5% on a 30-year loan, have fueled another wave of refinancings, which could run between $1 trillion to $1.5 trillion this year, estimates Joel Kan, associate vice president of economic and industry forecasting at the MBA.
But not everyone is able to take advantage. Liquidity has largely dried up in the jumbo market, which could reduce demand for the most expensive homes. And with 36.5 million people in the U.S. filing for unemployment benefits the past two months, lenders have become much pickier about who they are willing to underwrite and the documentation they require.
“We are back to levels that we haven’t seen since 2014,” Kan said of credit availability.
But Kan also added that the MBA expects home prices to “hold up well” this year, rising 4% nationally, which should help anyone who can no longer afford a mortgage and needs an exit.