The pace of homeowner forbearance requests has almost stabilized in recent weeks, giving mortgage agents hope that defaults and foreclosures will not increase as high as initially feared.
According to the Mortgage Bankers Association, about 4.2 million homeowners were on a forbearance plan as of May 17, or 8.36% of all outstanding loans. The figure climbed to nearly 8% as of May 3 from less than 1% in early March, but it has only risen slightly since.
“Although job losses continue at extremely high rates, mortgage agents are reporting only modest increases in the share of forbearance loans,” said Mike Fratantoni, senior vice president and chief economist of the MBA, with reference to the latest data.
Yet there is no modern baseline for forecasting a nationwide pandemic in which business activity has stalled for months.
“The big challenge for many service providers is trying to figure out what delinquency and foreclosures will look like, and it’s hard to model that,” said Allen Price, senior vice president and head of sales at BSI Financial Services, an Irving, Texas mortgage agent. “There is a population of people who, because they have been laid off or on leave and businesses won’t need everyone, there will be owners who will become delinquent and some will go into foreclosure. “
Price estimates that the national delinquency rate will peak at 12% to 15% nationally, with the foreclosure rate reaching 9% to 10%. Some agents will face higher defaults than others depending on the volume of loans in the states hardest hit by COVID-19.
With job losses and record unemployment, many agents feared mortgage payment skipping requests could reach 20-30%. Agents were relieved when the pace of forbearance requests fell to 93,000 borrowers in the third week of May, from 1.4 million requests in the first week of April, according to Black Knight, a mortgage analysis company.
“Perhaps what has brought confidence back the most is the slowdown in forbearance activity to just under 10%,” said Tom Millon, CEO of Computershare Loan Services, a third-party mortgage provider that manages over $ 100 billion in loans worldwide. “The abstention activity mimics the curve of coronaviruses, and the curve flattens and abstentions flatten. ”
As businesses begin to reopen after close orders, some borrowers will return to work and resume their payments. Data from service agents shows some homeowners could still pay off their mortgages but opted for “strategic forbearance” to save money. Another cohort of borrowers continued to pay their mortgage but had requested forbearance. Of those, only 12% continued to pay in May, up from 30% in April, Millon said.
Service agents try to reach borrowers by text and email to make sure those who are abstaining do not become delinquents. They are stepping up their hires in anticipation of a tidal wave of borrowers in need of loan modifications. Some service providers have streamlined options that don’t require borrowers to hand over documents, while others have to go through a hierarchy of options depending on what is offered by investors.
The forbearance relief passed by Congress in March makes it harder for agents to assess future defaults. The law only applies to loans guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration and small agencies. Qualifying homeowners can have their payments suspended for 180 days and request an extension in the event of economic hardship. Most banks offer the same loan relief from their portfolios, including jumbo loans.
It is less clear what happens with loans bundled into private label securitizations that are controlled by investors who may not allow the deferral of missed payments until the end of the loan.
As a result, some borrowers who stop paying for three, four or six months under a forbearance plan will have to start repaying or become in default. About 3.4 million loans were more than 30 days late in April as the delinquency rate hit 6.5%, the highest since 2015, according to Black Knight.
Laurie Goodman, vice president and co-director of the Urban Institute’s Housing Finance Policy Center, expects the failures to follow the general pattern of other disasters like hurricanes, where the homeowner recovers after a short period of abstention. Borrowers are in much better shape than during the mortgage crisis and have a lot of equity in their homes.
“We are revising all of our numbers now in light of the drop in abstention that we thought,” she said. “One thing we learned from 2007 is that liquidation is the worst option. Self-employed borrowers have been hit the hardest, and at the end of the day they’re going to find a solution because it’s so much cheaper. And in the worst case scenario, the borrower can still sell the house. ”
Generous unemployment benefits, dual-income households and a lower homeowner unemployment rate could mean fewer defaults as more borrowers resume their payments, Goodman wrote. in a recent report.
Many borrowers expect providers to offer easy online solutions for obtaining a loan modification, but not all of them.
“There is a wave of abstentions right now, and services need to decide what to do with payment deferrals, notifications and cash requests because there are huge transportation costs and volume that our industry does. has never seen – this is going to be huge, ”said Jane Mason, founder and CEO of Clarifire, a software company in St. Petersburg, Fla. that specializes in process automation. “A lot of people don’t want to talk to humans; they want to go online and apply. But there’s still a time when you’re going to have to come up with a communication. “
Mortgage service providers and investors actively recruit staff who specialize in loss mitigation, default and bankruptcy.
“These are expensive skills; this is a top-notch skill set, which means departments hire more people at higher wages, so operating expenses rise as incomes rise. are not increasing, ”Price said at BSI Financial. “Some service providers are looking at squeezed earnings and revenues, but the level of squeeze will differ for each institution.”