The pace of forbearance requests by homeowners has almost leveled off in recent weeks, raising hope among mortgage servicers that delinquencies and foreclosures won't rise as high as initially feared.
Roughly 4.2 million homeowners were in forbearance plans as of May 17, or 8.36% of all loans outstanding, according to the Mortgage Bankers Association. The figure ballooned to nearly 8% as of May 3 from less than 1% in early March, but it has risen only slightly since.
“Although job losses continue at extremely high rates, mortgage servicers are reporting only modest increases in the share of loans in forbearance," Mike Fratantoni, senior vice president and chief economist at the MBA, said in reference to the latest data.
Yet there is no modern-day baseline for forecasting a nationwide pandemic in which business activity has ground to a halt for months on end.
“The big challenge for a lot of servicers is trying to understand what the delinquency and foreclosures are going to look like, and it’s hard to model that,” said Allen Price, senior vice president and head of sales at BSI Financial Services, an Irving, Tex., mortgage servicer. “There is a population of folks that because they were laid off or furloughed and businesses are not going to need everyone back, there will be homeowners who go delinquent and some will move into foreclosure.”
Price is estimating that the national delinquency rate will peak at 12% to 15% nationwide, with the foreclosure rate hitting 9% to 10%. Some servicers will face higher delinquencies than others depending on the volume of loans in states hit hardest by COVID-19.
Given job losses and record unemployment, many servicers were fearful that requests to skip mortgage payments would hit 20% to 30%. Servicers were relieved when the pace of forbearance requests fell to 93,000 borrowers in the third week of May, compared with 1.4 million requests in the first week of April, according to Black Knight, a mortgage analytics firm.
“What has brought back confidence the most may be the slowing of forbearance activity just shy of 10%,” said Tom Millon, CEO of Computershare Loan Services, a third-party mortgage provider that services more than $100 billion in loans globally. “Forbearance activity is mimicking the coronavirus curve, and the curve is flattening and forbearances are flattening.”
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As companies start to reopen from shutdown orders, some borrowers will return to work and resume making payments. Servicers’ data shows that some homeowners still could pay their mortgage but opted for a “strategic forbearance" to conserve cash. Another cohort of borrowers continued to pay their mortgage but had asked for forbearance. Of those, just 12% continued to pay in May, down from 30% in April, Millon said.
Servicers are trying reach borrowers via text and email to ensure those in forbearance do not go delinquent. They are ramping up hiring in anticipation of a tidal wave of borrowers needing loan modifications. Some servicers have streamlined options that do not require borrowers to turn in documents, while others have to go through a hierarchy of options depending on what is offered by investors.
Forbearance relief passed by Congress in March is complicating servicers' assessments of future delinquencies. The law only applies to loans backed by Fannie Mae, Freddie Mac, the Federal Housing Administration and smaller agencies. Eligible homeowners can get payments suspended for 180 days and seek an extension for economic hardship. Most banks are offering the same relief to loans in their portfolios, including jumbo loans.
It is less clear what happens with loans packaged into private-label securitizations that are controlled by investors that may not allow a deferral of missed payments to be tacked to the end of the loan.
As a result, some borrowers who stop paying for three, four or six months under a forbearance plan will have to start repaying or will become delinquent. Roughly 3.4 million loans were more than 30 days late in April as the delinquency rate rose to 6.5%, the highest since 2015, according to Black Knight.
Laurie Goodman, vice president and co-director of the Urban Institute's Housing Finance Policy Center, expects delinquencies to follow the general pattern of other disasters like hurricanes, where the homeowner recovers after a short period of forbearance. Borrowers are in much better shape than during the mortgage crisis and have plenty of equity in their homes.
"We are all revising our numbers now in light of the lower pickup of forbearance than we thought," she said. “One thing we learned from 2007 is that liquidation is the worst option. Self-employed borrowers have been hit the hardest, and ultimately they are going to work something out because it is much more economical. And as a worst case, the borrower can always sell the home."
Generous unemployment benefits, dual-income households and a lower homeowner unemployment rate could translate into fewer defaults as more borrowers resume payments, Goodman wrote in a recent report.
Many borrowers have expectations that servicers will offer easy online solutions to get a loan modification, but not all do.
“There is an onslaught of forbearances right now, and servicers have to decide what to do with payment deferrals, notifications and liquidity demands because there are huge carrying costs and volume that our industry has never seen — this is going to be huge," said Jane Mason, founder and CEO of Clarifire, a St. Petersburg, Fla., software firm that specializes in process automation. "A great number of people don’t want to talk to humans; they want to go online and apply. But there is still a point in time when you’re going to have to offer some communication."
Servicers and mortgage investors are busily recruiting staff with expertise in loss mitigation, default and bankruptcy.
"Those are costly skills; they are a premium skill set, which means servicers are hiring more people at a higher wage, so operating expenses are going up at the same time revenue is not increasing," said Price at BSI Financial. "Some servicers are looking at compressed earnings and revenue, but the level of compression will differ for each institution."
