As the number of Americans requesting forbearance on their home loans rises, Fannie Mae FNMA, +0.59% and Freddie Mac FMCC, +1.89% are relaxing rules for mortgage servicers.
As of April 12, nearly 6% of all mortgages nationwide were in forbearance, according to data released Monday by the Mortgage Bankers Association. That equates to roughly 3 million homeowners, MBA chief economist Mike Fratantoni said. In a forbearance agreement, a borrower may skip or make reduced payments for the duration of the agreement.
Moving forward, Fannie Mae and Freddie Mac will be allowed to purchase loans in forbearance, the Federal Housing Finance Agency said this month.
“We are focused on keeping the mortgage market working for current and future homeowners during these challenging times,” FHFA Director Mark Calabria said in the statement. “Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending.”
Typically, delinquent mortgages and loans in forbearance are ineligible for purchase by the two government-sponsored mortgage enterprises. The move to change the policy was made because some borrowers have sought forbearance shortly after closing, before the lender had the opportunity to sell the loans, the agency said.
The FHFA said deals to sell loans to Fannie and Freddie would be “priced to mitigate the heightened risk” these loans represent. Lenders will pay Fannie and Freddie fees that will equal between 5% and 7% of the value of each loan, The Wall Street Journal reported.
Previously, the Federal Housing Finance Agency said Tuesday that servicers will only need to advance scheduled monthly principal and interest payments to investors for four months once a mortgage borrower has entered forbearance. After that, servicers will not be expected to advance scheduled payments while the borrower is in forbearance, regardless of the size of the servicer.
The move aims to bring “stability and clarity” to the $5-trillion housing finance market backed by Fannie and Freddie, FHFA Director Mark Calabria said in the announcement. “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,” Calabria said.
The CARES Act stimulus package guaranteed that all homeowners with federally-backed mortgage could receive forbearance for up to one year, if they are struggling to meet mortgage payments due to loss of income as a result of the coronavirus pandemic. “Forbearance inquiries will likely rise again as we approach May payment due dates,” Fratantoni added.
Because servicers are now required by law to offer forbearance to millions of homeowners, the mortgage servicing industry is facing a crisis. Under normal circumstances, mortgage servicers generally still need to make payments to the investors who own a loan, even if the borrower is delinquent or in forbearance.
The CARES Act did not include any funding for servicers. FHFA’s Calabria downplayed the risk facing servicers, arguing that it wasn’t systemic. The FHFA’s move will reduce some of this strain on servicers whose mortgages are backed by Fannie Mae; Freddie Mac’s policies already only required servicers to make payments to investors for four months if the borrower was missing payments.
The FHFA also clarified that mortgage loans with COVID-19 forbearance will be treated in the same manner as in the case of a natural disaster. This means that these loans will be allowed to remain in mortgage-backed securities pools. Normally, when mortgage loans are delinquent for more than four months they are purchased out of MBS pools by Fannie and Freddie.
But some analysts argued that the relaxed stipulations the FHFA announced Tuesday won’t be enough. Stephen Stanley, chief economist at broker-dealer Amherst Pierpont, wrote in a research note that there will need to be a “broader program of support from either the Fed or the federal government” to absorb losses shouldered by the mortgage services.
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