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  • Louis Baca

June Market Update

FORBEARANCE MADNESS


Since the CARES Act went into effect in March (allowing homeowners to go into forbearance due to a COVID-19 related hardship, without proof of hardship, and without recourse from the lenders), nearly 10% of all mortgages are now in default. In a recent survey conducted by Lending Tree, only 25% of borrowers said they had applied for forbearance due to an actual financial hardship.

Men were overwhelmingly more likely than women to apply for forbearance. Of those surveyed 37.8 percent of men and 10.2 percent of women had applied, although approval rates were similar with 75 percent of women and 81 percent of men being approved. Homeowners in higher-income brackets had a higher likelihood of both applying and forbearance and being approved.

About 36 percent of Millennials and 35.1 percent of Gen Xers asked for forbearing compared to 3.5 percent of baby boomers, possibly because more of the older group don't have a mortgage or are close to paying it off. Seventy-six percent of Millennials, 87.6 percent of Gen Xers and 76.9 percent of baby boomers were approved. The sample sizes for both Generation Z and the silent generation were so small that findings related to each group were not included in this study.

Five percent of homeowners who were approved for forbearance said they wouldn't have been able to make their mortgage payment without it and 26.2 percent said they could have paid their mortgages but would have needed to skip other essential bills. Almost 70 admitted they just wanted a break from their normal payments. That response was most prevalent among Millennials and Gen Xers, at 71 percent.

While fewer baby boomers applied for forbearance, those who did were in much greater need. In fact, 20 percent of baby boomers said they needed forbearance to avoid missing their monthly payment. – Mortgage News Daily

When borrowers do not make their mortgage payments, someone else still must. In the case of the CARES Act, initially, the servicers were on the hook to make payments to the investors, including taxes and insurance. Due to subsequent government policies, the federal government now ultimately makes most of the payments for all borrowers in forbearance; or should we say the US taxpayer (note: statement intentionally oversimplified). If you do not make your payment, no need to worry, your neighbors will make them for you.

As in 2008, and now in 2020, the government is bailing out the mortgage industry, and will continue to bail out the mortgage industry. Without a government bailout during unprecedented times of strain, the industry could collapse, bringing down the housing market and the global economy. Unlike 2008, the bailout in 2020 was due to government policy (i.e. CARES Act) that created the need for a government bailout in the first place.    



PENDING HOME SALES FALL SHARPLY Pending homes sales fell a record 21.8% in the month of April. This was the biggest drop since the National Association of Realtors began tracking this data in 2001.

All U.S. regions experienced declines, according to the NAR report. Pending home sales in the Northeast were 53% lower than a year ago, while the Midwest saw a drop of 26% from 2019, the report said. In the West, pending sales were 37% below a year ago, and in the South, sales were down 30%, NAR said.

Stay at home orders due to the pandemic were overwhelming to blame for the correction. Assuming there is not a substantial spike in COVID numbers, as states begin to roll back to work, home sales are anticipated to reverse course and trend upward once again. FORBEARANCE REQUESTS SLOW AS NUMBERS RISE

As of May 10th, the total number of loans that were in forbearance hit 8.16% (now higher). The number of homeowners requesting forbearance has slowed, but overall numbers continue to climb.

Chart: M

BA

Loans with the highest rate of forbearance are those guaranteed by Ginnie Mae (i.e FHA and VA) now at 11.26%. Ginnie Mae loans are largely originated with the greatest risk due to high loan to values and lower credit score requirements. Agency loans (i.e. Fannie Mae and Freddie Mac) forbearances ticked up to 6.25%, and generally have more stringent underwriting requirements. Private or portfolio loans increased to 9.25%. FANNIE MAE & FREDDIE MAC ONE STEP CLOSER TO PRIVATIZATION

In 2008, during the Great Recession and the housing and mortgage meltdown, the government bailed out multiple large lending institutions and seized control of Fannie Mae and Freddie Mac.

On Thursday, May 21st, the Federal Housing Finance Agency (FHFA) announced that they were rolling out a new rule allowing the GSEs to retain profits to rebuild capital, enabling them to exit conservatorship. Mark Calabria, the Director of the FHFA is pushing the end of conservatorship and the complete privatization of the GSEs.

In late 2019 the Treasury begin allowing the GSEs to retain up to $45 billion in capital in preparation to exit conservatorship. That alone was a huge leap, as all the GSEs profits had been previously swept by the Treasury and they were previously holding $0 in capital. Yes, $0. The new proposal would force the GSEs to hold at least $234 billion in capital, mirroring the capital requirements of other banking institutions.

“The FHFA’s proposed rule puts the GSEs on track to be the strongest capitalized financial institutions in the world, which we believe should create substantial global investor demand,” Howlett wrote in a note to clients. “We note that the release should come not only as a relief to the market (i.e., worst-case scenario avoided) but also as the strongest indication the FHFA remains committed to privatizing Fannie/Freddie and releasing them from government control.” – Matthew Howlett, Instinet analyst (housingwire.com) 

Howlett states that it will likely take several years to fully exit the GSEs from conservatorship. He also states that an end to conservatorship will likely increase the cost of a mortgages provided by the GSEs, roughly 50% of all loans in the U.S.

“This national health crisis has affirmed the importance of the Enterprises’ mission to serve the American housing market during good times and bad,” Calabria said.

“When credit dries up, low- and moderate-income households are hurt most. We must chart a course for the Enterprises toward a sound capital footing so they can help all Americans in times of stress. More capital means a stronger foundation on which to weather crises. The time to act is now.”

The FHFA’s proposal is supported by Department of the Treasury Secretary Steve Mnuchin, who said that the rule is an “important” step in ending the GSE conservatorship. “I commend Director Mark Calabria and the FHFA for their work on this issue,” Mnuchin said in a statement. “Establishing regulatory capital requirements for both GSEs represents an important step toward bringing the conservatorships to an end. Appropriate capitalization of the GSEs will be critical to protecting taxpayers, fostering market discipline, promoting stability in the housing finance system, and ensuring durable consumer access to mortgage credit.”

The GSEs have been “social” programs since their first inception in the 1930s. They are the foundation of the mortgage industry and the housing market as we know it. If the Administration is successful in the complete privatization of Fannie and Freddie, will they be able to continue to provide responsible liquidity to the mortgage market, while being solely focused on the value of stockholder shares. FORBEARANCE REQUESTS SLOW

At the time of this report, 4.8 million mortgages are in forbearance. – Black Knight.

The overall share of home loans with suspended payments stands at 9%, Black Knight said. Broken out by investor types, 7.2% of mortgages backed by Fannie Mae and Freddie Mac are in forbearance. That’s a total of 2 million mortgages.

The forbearance share for home loans backed the Federal Housing Administration and the Veterans Administration was 12.6%, or 1.5 million mortgages.

At this week’s level for all types of mortgages in forbearance, servicers need to advance a combined $3.6 billion a month in principal and interest payments to holders of government-backed mortgage securities on COVID-19-related forbearances, the report said.

That’s on top of the $1.5 billion in payments for taxes and insurance they are required make on behalf of borrowers. Typically those so-called T & I payments come out of a mortgage holders escrow fund they pay into every month. housingwire.com

Forbearance requests are now down to approximately 7,000 per week.


NEW GUIDANCE FOR SELF-EMPLOYED BORROWERS

Last week, Fannie Mae issued guidance for self-employed borrowers who may be adversely affected by the pandemic.

 “Income from a business that has been negatively impacted by changing conditions is not necessarily ineligible for use in qualifying the borrower,” the letter said. “However, the lender is required to determine if the borrower’s income is stable and has a reasonable expectation of continuance.”

“Lenders must review the profit and loss statement, and business depository accounts if required, and other relevant factors to determine the extent to which a business has been impacted by COVID-19,” the Fannie Mae letter said.

Per Fannie Mae, self-employed borrowers must provide the following:

  • An audited year-to-date profit and loss statement reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application date or an unaudited year-to-date profit and loss statement signed by the borrower reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application date, plus two business depository account(s) statements no older than the latest two months represented on the year-to-date profit and loss statement.

  • Two of the most recent depository account statements to support and/or not conflict with the information presented in the current year-to-date profit and loss statement. Otherwise, the lender must obtain additional statements or other documentation to support the information from the current year-to-date profit and loss statement.

FHFA CHANGES STANCE ON FORBEARANCE REFINANCES

The CARES Act does not allow lenders to report a borrower late that is in forbearance, although the industry frowns on those that do not pay their mortgage, regardless of the reason. Last week, FHFA announced that those that have gone into forbearance will be able to qualify for a refinance if the homeowner has made three consecutive on-time payments after the forbearance terminates. 

Furthermore, if the homeowner went into forbearance, but never missed a mortgage payment, the homeowner would be immediately eligible for a refinance and take advantage of historic low-interest rates.

However, while the lender can not report the borrower late, they can, and often do report that the loan is in forbearance. It is likely that a lender performing a refinance will require evidence of consecutive on-time payments and may also ask to have the “forbearance” removed from the credit report prior to closing a new loan. If you are currently in forbearance, anticipate having to jump through a few hoops before conducting a new home loan. RATE WATCH – LOWER


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