Amid coronavirus-related surge in mortgage payment forbearance, servicer liquidity concerns mount

Four month cap on delayed mortgage payments for Freddie, Fannie loans

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As millions of Americans facing coronavirus-related financial challenges put their mortgage payments on pause, the government moved to alleviate imminent concerns among mortgage servicers about cash flow in the industry.

The Federal Housing Finance Agency (FHFA) on Tuesday said it would establish a four-month advance obligation limit for Fannie Mae scheduled servicing for loans – in line with what Freddie Mac is following.

“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market," FHFA Director Mark Calabria said in a statement. “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."

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Servicers are generally required to make advanced principal and interest payments, regardless of the borrower’s payments. Under the new guidelines, they will only be responsible for four months of those obligations.

Fannie and Freddie will also be instructed to keep mortgage loans that have not been paid for more than four months in mortgage-backed security pools during the forbearance period. Normally loans that are more than four months delinquent were bought out of the pools.

Forbearance is when a lender allows a mortgage holder to pause, or temporarily reduce, payments with the expectation that everything is repaid in full over time.

As previously reported by FOX Business, more than 2.9 million homeowners were in forbearance – or 5.5 percent of all mortgages – as of April 16, according to data from real estate data and analytics firm Black Knight. That amounts to about $651 billion in unpaid principal.

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Concerns that the massive jump in forbearance requests could strain the industry have been circulating for weeks.

“It is expected that requests will continue to skyrocket at an unsustainable pace in the coming weeks, putting insurmountable cash flow constraints on many servicers - especially IMBs [independent mortgage banks]," Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, said in a statement earlier this month.

The industry had been calling for the Treasury and the Federal Reserve to create a liquidity facility for servicers.

And while acknowledging that the cap on obligations is helpful, the industry is still hoping that facility will be established.

"While this news reduces servicers' worst-case cash flow demands considerably, we continue to stress the need for Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it in order to continue to make payments to investors, municipalities, and insurers on behalf of borrowers who have been granted forbearance required under the CARES Act," MBA CEO Robert Broeksmit, said in a statement.

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Part of the multitrillion-dollar stimulus package passed by lawmakers called for lenders, including Fannie and Freddie, to allow people to put their payments on hold if they are experiencing coronavirus-related financial difficulties.

The upside of the forbearance policy is that it could position the market for a quicker rebound once the economic situation normalizes.

“Less foreclosures assure stable home prices and a much better position for the economy to return back to normal after the pandemic,” Lawrence Yun, chief economist and senior vice president at the National Association of Realtors, told FOX Business

However, those who can continue making regular payments should do so, Yun advised.