It’s the first of the month, and with that comes fear and uncertainty that both homeowners and renters won’t be able to make payments due to loss of income related to the coronavirus.
While it’s not clear how bad things will get just yet, CNBC interviewed FHFA director Mark Calabria to get some preliminary numbers, which he himself called “very rough” and subject to change quickly.
Two Million Missed Mortgage Payments by May
- 300,000 missed payments for Fannie/Freddie owned loans in April
- 700,000 missed payments for overall market in April
- Jumps up to 1M and 2M respectively by May
- Expected to be worse for government loans backed by FHA/VA
He currently estimates that roughly 300,000 home loans backed by Fannie Mae and Freddie Mac could go delinquent in April, which is just over 1% of their book.
For the overall mortgage market, he said that translates to roughly 700,000 delinquent home loans.
By May, those numbers jump up to one million and a little more than two million missed payments, respectively.
He sees more stress in FHA/VA loans due to their lower credit score requirements, higher DTI ratios, and so on.
While it sounds pretty dire, Calabria was quick to point out that it only represents somewhere between 3-5% of the market, and that he’s “not seeing worst-case scenarios.”
This is counter to a comment made by MBA chief economist Mike Franantoni, who warned that if a quarter of U.S. homeowners (~12.5 million households) sought six months of mortgage forbearance, loan servicers could owe between $75 and $100 billion to investors.
Meanwhile, Mark Zandi, chief economist for Moody’s Analytics, said up to 15 million Americans could default if the lockdown goes through summer.
That would likely crush many loan servicers who lack the liquidity to face a barrage of missed payments, but the hope is it doesn’t come to that. Or the Fed steps in to help.
Calabria noted that if borrowers only miss 2-3 months of payments, most loan servicers should be OK, but if it goes beyond that time frame, a lot of firms will face liquidity problems.
Top retail mortgage lender Quicken Loans also services about 1.8 million home loans, and CEO Jay Farner said the company’s balance sheet is “strong enough” to pay holders of bonds backed by its mortgages in the event many default.
However, most forbearance requests have apparently come from homeowners who’ve never been late, which he says as a good sign they’ll get back on track once normal employment resumes.
Additionally, he pointed out that 70-80% of calls were from homeowners not yet facing hardship, who apparently just wanted to know their options.
He did reiterate that, “If you can pay your mortgage, please do so.”
The CARES Act Allows Borrowers to Miss 6-12 Mortgage Payments
- Homeowners with a federally-backed mortgage can request forbearance for 180 days (and an additional 180 days)
- Applies to FHA/VA/USDA and Fannie Mae/Freddie Mac loans
- Simply requires borrowers to request assistance from their loan servicer and say they are facing a hardship related to COVID-19
- Lenders may not charge fees, penalties, or interest beyond what would have been due had borrower remained current
The passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows homeowners with a federally-backed residential mortgage to request forbearance for up to 180 days, or six months.
This includes FHA loans, USDA loans, VA loans, and home loans purchased or securitized by Fannie Mae or Freddie Mac.
That’s most of the mortgage market, aside from jumbo loans and portfolio loans kept on banks’ books.
It also grants them the ability to request an additional 180 days of forbearance if needed, or to cancel it at any time.
During the forbearance period, lenders may not charge fees, penalties, or interest beyond what would have been due had the borrower made all contractual payments on time and in full.
It’s still unclear what happens after the forbearance period ends. Does the loan servicer assess the borrower’s ability to get current or simply add the missed mortgage payments to the end of the loan term? Who knows.
Update: You can now get up to 15 months of mortgage forbearance.
Can Anyone Get Mortgage Forbearance Under CARES Act?
- The CARES Act doesn’t define what a “financial hardship” is
- Nor are loan servicers allowed to require additional documentation to grant mortgage forbearance
- Both Calabria and Treasury Secretary Steven Mnuchin have urged homeowners to pay their mortgages if they can
- But at the moment it appears anyone can qualify without proof of hardship
All a homeowner has to do to get mortgage forbearance is submit a request to their loan servicer that they are “experiencing a financial hardship due, directly or indirectly, to the COVID-19 national emergency,” regardless of delinquency status.
Other than that attestation from the homeowner, a loan servicer may not require additional documentation to grant mortgage payment forbearance.
This means you don’t have to prove loss of income or unemployment to qualify, something Calabria acknowledged while saying “we’re operating on the honor system.”
In other words, it should be very easy to get six to 12 months of mortgage payments put on hold with little more than a request, without the typical hoops to jump through.
While great for homeowners in need, it could be a disaster for loan servicers and the mortgage industry in general, assuming millions take part in the relief effort.
Read more: What’s the Last Day to Apply for Mortgage Forbearance Under the CARES Act?
Unless the forbearance also includes a prohibition on reporting loans as delinquent to the bureaus- or other lenders- I see a lot of potential harm on a massive scale to credit ratings. Especially if it is just a suggestion for lenders not to ding your credit vs. a requirement.
Paul,
I think they are required not to report anything negative to the credit bureaus, but that may only be during the covered period. After who knows? In any case, given the extreme situation I think lenders would be more forgiving of such delinquencies in the future, even more so than those during the subprime debacle a decade ago.
Does that mean the loans are not due for 6 month or 1 year. What is the catch or cost?
Deby,
Banks are allowing 180 days of forbearance, with an additional 180 days if requested, so more or less 12 months. The “catch” is that they need to be paid still, either when you sell the property or refinance the mortgage. So the payments are just delayed, not avoided.