What happens when forbearance ends?

One industry expert worries about the impact on the value of servicing – and suggests a solution inspired by a GFC-era program

What happens when forbearance ends?

While the mortgage market appears to be stabilizing from some initial shakiness due to the COVID-19 pandemic, one mortgage expert warns that more problems could lie ahead due to the record number of borrowers currently in forbearance.

“Independent mortgage bankers and wholesale lenders and the like have had to recover from what had to be a very challenging March, but I think that things will come back into line and normalize in the next couple of months,” said Rick Arvielo, CEO of New American Funding. “I think the bigger detrimental thing facing us is what’s going to happen with all the borrowers who are currently forborne, and how that’s going to impact the value of servicing, and in turn the value of loans.”

Arvielo criticized the initial uncertainty around how borrowers should catch up when their forbearance plans end.

“When this first started, your option was a lump sum, or if you did three months’ forbearance, you could do a 50% larger payment for six months to catch up,” he said. “Neither of those options were really realistic.”

The Federal Housing Finance Agency only clarified in April that borrowers would not be required to pay a lump sum when their forbearance plans ended.

Arvielo also called for loosening the restrictions on refinancing for borrowers in forbearance.

“Let’s somebody got a loan in 2018 or 2019. So they’re sitting on a 4.25% rate,” he said. “Well, now rates are as low as 2.75%. You go into forbearance, and when you come out, you’re still sitting at 4.25%. Can you refinance? Until recently, the answer was no – you had to make 12 timely payments. Now Fannie and Freddie are finally saying you have to make three timely payments and then refinance.”

Under the current guidance, borrowers can also refinance if they are in forbearance but have kept making their monthly payments.

Arvielo suggested that the GSEs should take a page from the Home Affordable Refinance Program (HARP), a now-expired government program to help underwater borrowers. HARP was set up by the FHFA in 2009, when many borrowers found themselves seriously underwater as a result of the 2008 housing meltdown. The program allowed borrowers to either lower their monthly mortgage payments or lower their interest rates, allowing them to build equity faster.

“What we’re advocating is sort of a modified HARP,” Arvielo said. “It was a huge success. It put so much money back in borrowers’ pockets, because they were doing the right thing – they were stating in their homes even though their homes were underwater.

“So if I’m at a 4.5% interest rate, and I didn’t make payments for six months, let me roll that sum up into the existing loan balance and refinance, just like HARP,” Arvielo said. “Your payment would likely be lower than it was without the forborne amount, and everybody wins. Fannie wins because they get that amount. The industry wins because we get to write a bunch of new loans, and the borrower wins because they get the lower rate.”