We’re approaching the one-year anniversary of mortgage forbearance programs and while many American borrowers have gotten off the program for one reason or another, a frustrating number of homeowners remain. A little less than 5.5% of homeowners are still missing mortgage payments, representing a group of homeowners who have not gotten back on their feet since the initial COVID-related lockdowns in spring of 2020.
This group of borrowers represents a significant policy challenge, as well as a potential risk to the country’s current hot housing market and ongoing rapid house price appreciation. According to Matt Tully (pictured), VP of agency affairs and compliance at Sagent Lending Technologies, these borrowers and the wider industry can take some hope in the Biden administration’s promise to address the issue. However, there are still a number of challenges ahead and individual mortgage pros may play a crucial role in the months to come.
“There certainly are risks for these borrowers,” Tully said. “If we [extend] the foreclosure moratorium but don’t do anything about forbearance, then the borrower ends up in this kind of no man’s land, post-forbearance, pre-foreclosure. We’re saying servicers can’t take these homes back, but we’re not clear on what the borrower’s status is. That has all sorts of implications for investors like the GSEs and Ginnie Mae, and that has implications for the individual borrower’s credit report.”
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Tully believes that the range of people impacted by a scenario like this means policymakers will have to act. That could include extending forbearance for these borrowers as vaccines are rolled out and harder-hit sectors of the economy are able to recover.
While any sudden end of forbearance could pose some serious risks to the overall shape of the housing market, Tully emphasized that this is not a situation like in 2008. These borrowers did not enter into homeownership in a fundamentally weak place, rather they have been put in a tough spot by circumstances outside their control. Moreover, the broad strength and rapid house price appreciation we’ve seen across so many housing markets should mean that they can use the paper equity accrued in their home to prevent a short sale situation.
A challenge that Tully also foresees is the simple habit of mortgage payment. While he noted we haven’t seen people using forbearance to live ‘rent-free’ simply because their neighbors are, he is concerned about how these borrowers get back on their feet. Rehabilitating this many borrowers, according to Tully, is something the US has never done before.
He believes that the immediate fix to the problem is a continuance of forbearance past the initial 12-month period. Beyond that, it’s up to the key investors and players in this space like Fannie, Freddie, Ginnie, the FHA and the VA to work on what can be done to modify or restructure these loans. This is an area where Tully believes, too, that individual mortgage professionals can play an absolutely crucial role.
“For mortgage professionals, it’s really the question of ‘how can you take advantage of some of these macro factors to the benefit of the borrower?’” Tully said. “You can tell them, ‘let’s modify your rate, you’ll have to start making your payment again, but your rate is going to be a lot lower than it otherwise would and I don’t necessarily have to subsidize you or do anything too crazy.’ I think that’s where it evolved to and that will be a discussion really between servicers and the investors in the space to find out if we have the ability to go in and renegotiate some of these mortgages to address the terms.”