While the CARES Act has allowed millions of homeowners nationwide to put their mortgage payments on hold, doing so has left lots of questions for mortgage lenders.
One being how they’d continue to pay investors while the loans they service were in forbearance. The FHFA clarified that piece yesterday by agreeing to only hold servicers to the first four missed payments.
But how do they originate new loans if borrowers turn around and stop paying right away? Will lenders be punished, even if they had no idea these homeowners would immediately request forbearance?
Fannie and Freddie Will Temporarily Buy/Securitize Loans in Forbearance
- Lenders can now sell or securitize their new mortgages even if in forbearance
- This is a temporary policy aimed at keeping the mortgage market liquid
- Loans must still meet the general requirements of Fannie Mae and Freddie Mac
- Eligible loans will be priced to mitigate the heightened risk of loss to the GSEs
To alleviate some of that concern, both Fannie Mae and Freddie Mac (the GSEs) have announced a temporary policy to purchase mortgages actively in forbearance plans, counter to their long-held position.
Typically, mortgage loans that are either delinquent or in forbearance are ineligible for delivery under Fannie/Freddie requirements.
However, things are far from typical at the moment thanks to the coronavirus (COVID-19).
In short, some borrowers have sought mortgage forbearance just after closing on their loan, before the lender could actually deliver it to the GSEs.
This put lenders in a bad spot if they wound up stuck with the loan, and unable to unload it, thereby putting their liquidity at risk.
Today’s action removes “that restriction for a limited period of time and only for mortgages meeting certain eligibility criteria.”
For eligible loans that can be purchased by the pair, they will “be priced to mitigate the heightened risk of loss” to the GSEs.
Which Loans Are Eligible?
- Home purchase loans and rate and term refinances only
- No cash out refinances may be delivered while in forbearance
- Reason for forbearance must be directly/indirectly related to COVID-19
- Loans must not be more than 30 days delinquent with note date on/after February 1st, 2020
It should be noted that not all mortgages are eligible for this new, temporary benefit.
First off, this relief is only limited to home purchase loans and rate and term refinances. No cash out refinances are permitted.
Additionally, the note date must be on or after February 1st, 2020 for May 1st delivery to the GSEs.
The loan must also not be more than 30 days delinquent at the time of sale or securitization to Fannie/Freddie.
Perhaps most important, the forbearance must be related to COVID-19, either directly or indirectly.
It shouldn’t be for some other reason, though at the moment this appears to be the one and only reason anyone is requesting forbearance.
For the record, Fannie and Freddie are also tacking on hefty loan-level pricing adjustments (LLPAs) as follows:
– 500 basis points (5.000%) for loans where any borrower is a first-time homebuyer
– 700 basis points (7.000%) for all other loans
Since cash out refinances aren’t eligible, those may be even more expensive for the time being relative to purchase loans and rate and term refis.
Fannie has also warned loan servicers to “not in any way discourage borrowers from contacting them or encourage borrowers to delay notifying them either before or after the note date if they are experiencing a COVID-19 related financial hardship.”
In other words, don’t tell them to hold off on the forbearance request so they can sell off their loans first without issue.