At the beginning of April, PennyMac announced to originators that it will no longer purchase loans that are in forbearance, adding yet another layer of difficulty to the process of doing business at a time of severely limited liquidity. But the lender wasn’t done there: It also let the industry know that any loan for which forbearance is requested within 15 days of purchase may result in a repurchase.
It's no small ask at a time when, according to the St. Louis Federal Reserve, over 16 million Americans have filed jobless claims in the past three weeks, equivalent to 10% of the U.S. workforce. It is inevitable that many of the people now out of work were also recently put into mortgages. As those loans turn sour, originators will be faced with the onerous and costly process of repurchasing them.
Some may still be looking to the days of the 2008 meltdown for some sort of perspective on the threat originators are facing in the wake of COVID-19, but others, like R. Christopher Whalen of Whalen Global Advisors LLC, feel the comparison is largely unhelpful.
“This is different,” Whalen says. “We’ve got people out of work. We have a lot of small businesses that are going to go under and burn us.”
Originators will now be left holding the bag. How that plays out depends on multiple factors: originators’ ability to create and maintain healthy mortgages for their clients, the ongoing policy response and the eventual recovery of the U.S. economy as a whole.
Whalen says originators have multiple ways of approaching a lending landscape now freshly ridden with pitfalls. First, they can do their due diligence and ensure their clients are put into mortgages they can afford – a reasonable enough suggestion, but not one that’s necessarily followed to a T in every loan office in the country.
“They’re getting borrowers in some cases to attest to their financial assets and their ability to pay,” Whalen says. “If it turns out that they immediately turn around and ask for assistance, that’s basically fraud.”
That level of strict due diligence is something Whalen looks for when his company is considering purchasing loans.
“We have to make sure those mortgages are good, and that they’re not going to go sideways, because our criteria for accepting them is that those loans are eligible for pooling into a security.”
But even the most fussed-over mortgages can go bad, and when they do, originators feel the pinch almost immediately.
“Normally when a loan goes into default, the fees go up tenfold,” Whalen explains. “The moment you have to start engaging with the borrower and processing loan forgiveness or modifications or foreclosures the costs go up dramatically.”
Such is the threat facing the mortgage space: thousands of loans kicked back for repurchase, clogging up the machinery and demanding time and resources for which, because of a lack of associated servicing fees, there is rarely any compensation.
“So the burden on the industry is going to be financing the operational nut here, which may require them to double headcount in the next 12 months because there will be that many mortgages that are screwed up that will have to be fixed,” says Whalen.
The overall impact of all these potential repurchases is impossible to gauge, and the outlook is made even muddier by mixed messaging at different levels of authority, a triage approach to policy creation and the still unanswered question of if, or how, any of the forthcoming, and sure to be increased, financial assistance for homeowners, originators and lenders will be paid for.
“It’s a funding cost the industry will have to meet,” Whalen says, “and I think the banks are going to help them with that. The government may have to backstop all of this. But I think the banks, frankly, are in a position where they can liquify this stuff.”
There is also the matter of what those in the industry should be telling their confused and desperate clients about what forbearance could mean to their financial security.
“This is a big deal because we have to know what to do. If people are people calling us looking for forbearance, they want to know what the rules are,” says Whalen. He sees a simple solution for the FHA market arriving in the form of homeowners winding up in arears when they sell a property and owing the FHA the remaining balance. It’s an option he says won’t disturb the mortgage inside its pool nor will it default the client.
To avoid as much turbulence as possible, Whalen feels originators need to work to keep homeowners where they are.
“That’s the best alternative,” he says. “If not, talk to them. If they need to move, you organize the sale of the house immediately. Foreclosures where there’s opposition from the borrower can get really expensive.”
For originators who can rehabilitate a mortgage, selling to PennyMac again becomes an increasingly attractive option.
“You’d do very well with that,” Whalen says. “You may not get paid any special servicing fees, but you’d take a three-point gain on the sale.”