As hundreds of thousands of mortgage borrowers begin exiting pandemic forbearance programs, lenders should closely monitor their portfolios to mitigate risk. An estimated 1.5 million mortgage loans remained in forbearance as of September 5, or about 3.08 percent of the total outstanding, according to the Mortgage Bankers Association (MBA). About half of those loans are expected to exit forbearance by the end of October, and 1 million by the end of the year, according to Black Knight.
“We expect that sub-set of loans to decline and change,” said Kathryn Ferriman, SitusAMC Vice President, Reverse Mortgage Valuation and Analytics. “But now is time for lenders to consider the full impact of forbearance and late-stage delinquency on their mortgage portfolios."
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020, allowed borrowers with federally backed mortgages –- such as those insured by the Federal Housing Administration and those guaranteed by Fannie Mae and Freddie Mac -– to request forbearance from loan servicers without documentation of need. Forbearances peaked at 4 million mortgages in May 2020, according to Freddie Mac.
Borrowers were allowed to postpone payments for up to 18 months. The moratorium expired on July 31, 2021, and borrowers are resuming payments on a rolling basis –- starting with homeowners who entered the program in Spring 2020 and took advantage of extensions. Today, about 82 percent of borrowers are in extended forbearance plans; 10 percent are in the initial forbearance plan stage; and the remaining 8 percent are forbearance re-entries, according to MBA.
The Consumer Financial Protection Bureau is requiring mortgage companies to evaluate borrowers to determine if they qualify for assistance programs, and offer them options before filing new foreclosure claims on most mortgages. According to Ferriman, borrowers have a number of ways to exit forbearance:
- pay back everything they owe immediately;
- boost monthly payments over the life of the loan to make up what is past due;
- defer the payments to the end of the mortgage;
- modify the loan terms if they face long-term or permanent financial hardship;
- sell the property and repay the loan;
- or go through the foreclosure process.
In August, the first month after the moratorium expired, foreclosure activity jumped 27 percent to 15,838 properties, according to ATTOM’s Foreclosure Market Report.
“Lenders should be tracking changes in delinquencies and monitoring changes in the forbearance population within their servicing portfolio,” Ferriman said. “Analyze the behavior of loans leaving forbearance to understand potential risks.”
Strong home price appreciation could help many borrowers avoid the worst. The national median price for a single-family home had risen 23.6 percent year-over-year to an all-time high in May, according to the National Association of Realtors. Some 93 percent of delinquent borrowers have at least 10 percent equity in their homes, according to one report, which would allow them to sell their properties, repay lenders and still retain some profit
“Given robust home price appreciation, we will probably see a combination of loan payment deferrals, modifications and home sales as borrowers exit forbearance,” said Mark Garland, Managing Director, Analytics and Head of MSR Valuations. “Borrowers who end up in foreclosure are likely to be those who were already delinquent on their mortgages before the pandemic started. Borrowers who could have been in the last month of the foreclosure process were allowed to enter forbearance under the CARES Act.”
As lenders get a clearer picture of how their loans are exiting forbearance, SitusAMC can help evaluate the financial impact on portfolios. For more information, contact Mark Garland at (720) 641-5174.