For weeks, the mortgage industry has been crying for help from being left on the hook to pay for much of the government's mortgage bailout. Now, they're getting some relief.
More than 3 million borrowers have taken advantage of the mortgage forbearance program, which allows those with government-backed loans to delay up to a year's worth of monthly mortgage payments if they have been hurt financially by the economic fallout from the coronavirus.
Borrowers would have to make those payments at a later date, or over time. Mortgage servicers, however, the companies that collect the payments, were required to advance that money to bondholders for up to a year.
Now, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, has reduced that requirement to 4 months.
"The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market," said FHFA Director Mark Calabria. "Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment."
The percentage of loans now in forbearance jumped from 3.74% of servicers' portfolio volume in the prior week to 5.95% as of April 12, 2020, according to new numbers released Monday by the Mortgage Bankers Association. The share of Fannie Mae and Freddie Mac loans in forbearance increased from 2.44% to 4.64%. Since the program rolled out a little over three weeks ago, the number of loans in forbearance has tripled.
The mortgage industry has been fighting hard for relief, led by the Mortgage Bankers Association. While they still want a larger liquidity facility from the Federal Reserve, they praised this latest development:
"This is an important step in reducing the maximum liquidity demands for servicers who are providing borrowers who have a pandemic-related hardship with mortgage payment forbearance," said Bob Broeksmit, CEO of the MBA.
"While this news reduces servicers' worst-case cash flow demands considerably, we continue to call on the Treasury and Federal Reserve to provide a liquidity facility to ensure that servicers can continue their important work of advancing missed payments to investors as well as paying property taxes and insurance premiums on behalf of struggling borrowers."
As a result of the growing number of loans in forbearance, the overall mortgage market has tightened up dramatically, with lenders raising minimum FICO scores and pulling back from jumbo or high cost loans.
"We believe this is a positive step in addressing the liquidity needs of mortgage servicers. It is not a perfect solution, but it offers relief that should help the mortgage market," wrote Jaret Seiberg housing policy analyst for Cowen Washington Research Group. "This solution also should be positive for the MBS market as it clarifies that Fannie and Freddie will not purchase the mortgages out of the pools after four months. Instead, they will advance liquidity to servicers."
While the four-month limit will certainly help, if the share of loans in forbearance jump even more dramatically over the next month, some servicers might be unable to fund even those payments.
Larger banks, like JP Morgan Chase and Wells Fargo, have far more capital in reserve to fund these payments, but non-bank lenders and servicers do not. Before this crisis, mortgage delinquency rates were near record lows.