A Take on Mortgage Forbearance

To all my Clients, Partners and Associates

As we are coming up on the sixth week of quarantine here in Michigan, it is taking a toll on the Real Estate and Mortgage industry.  Where does it end?  Last week Chase Bank announced it will require any borrower to have a minimum of a 700 credit score and will require a 20% down payment to purchase a home.  Today I read a report that Chase will also suspend its HELOC or  (Home Equity Lines of Credit) until further notice.  We at highlands Mortgage are still have our low down or no down programs, with minimum credit scores at 640

We have noticed other investors temporarily suspending many loan programs such as the MSHDA State backed down payment assistance program, the FHA 203 rehab loan, Conventional rehab loans as well.   New construction loans are scarce and very limited in the marketplace.  

So where do we go from here?   What is going to happen in the next 6 months?  The following is merely my opinion but base it on 20 years’ experience in the industry and has been through multiple downturns in the market.

First, let’s discuss forbearance.  The government says you do not have to pay your rent or your mortgage, and nobody can evict or foreclose on you.   A pretty bold statement.  Let’s look at the effects.   Forbearance means that one could delay payment for a period of time.  Many lenders are offering forbearance to current clients. Each lender will have their own guidelines as to how their program will work.  In a nutshell, if the lender states you do not have to make a mortgage payment for 3 months. In the fourth month, you owe not only the fourth-month payment but the 3 payments you had previously missed.  So, these 4 payments are due in full.   That’s a tough pill to swallow.

If you can’t make the initial late payment, how is one to come up with 4 months of payments when the forbearance period is over?  These homeowners are already in financial hardship.   Other servicers may defer the payments, meaning adding them to the end of the loan or mortgage.   This would be the best option, but you must check with your current servicer and understand their policy in detail before you consider the best option for you. This is leading down a very slippery slope and no mortgage company has set forth how they will view or underwrite ones who have taken advantage of this forbearance program.

In Michigan, we are nearing 25% unemployment.  Let’s consider these 25% delaying their mortgage payment.   So, what happens?   The servicer or the people you make your mortgage payments too, are still on the hook to make your mortgage payment, to their investor.   Remember these mortgages are considered mortgage back securities or MBS for short.  It’s like buying a stock in a sense.    So, you get a mortgage to say at 3.5% interest. You close the loan.  We the lenders sell the mortgage to a servicer.  This is who you make your payment too.   The servicer pools together hundreds or thousands of loans together and sell them on the secondary market as mortgage back securities, hence MBS.   The secondary market meaning big blocks of investors in which you also invest in with many of your retirement accounts.

Your 401k, retirement or mutual funds?   Many of these investment vehicles are backed by MBS or mortgage back securities.   Real estate has always been a very safe investment.    You say you want to invest in something not too aggressive but safe.  These are the mutual funds that contain many mortgage back securities.  As these investments offer steady modest income or returns to the investors over a 15- or 30-year term,  at generally a fixed rate.   Not bad at all.

So let’s go back to the forbearance.  So, say 25% of homeowners do not make their payment or delay the payment.   Remember the servicer is still on the hook for making these payments to their investor or you the stockholder who holds a percentage of your retirement in these type investments.

If the servicer now on the hook for making all these payments,  now may not have the capital, liquidity, or means to by pools of new mortgages from us the lenders. So now the economic wheels start s to slow down.  And remember these servicers actually pay us the lenders,  a fee to service the loan over the loan terms so they can get a cut of the profit over time. 

When the servicers pay us or buy our mortgages, we have more money to lend to you the consumer. That is how lenders work. If servicers are not receiving payments from the homeowners due to forbearance, yet on the hook to the investors for the payments, plus the taxes and insurance on these properties, they will not have the money to buy more mortgages from me,  the lender.  You get the picture and see how this works?

Let’s add some fuel to the fire.  You obtain a mortgage and close on the loan in March.  Your first payment would be due May 1st.  Again, this would be made to the servicer.  If you do not make the first payment due to forbearance or any other reason this is considered a fist payment default.  Due to policy, we the lender now have to buy back the loan from the servicer.  Now we own that mortgage and must service it for the term of the loan.  It becomes unsellable to the secondary market.  So if that was a 250k loan, that is 250k we no longer have to lend to other borrowers.  You multiple this by thousands of mortgages and it can wipe out a lender’s liquidity to continue to lend money to new borrowers in the future.  If the borrower makes the first 6 payments then defaults, the servicer is now on the hook to make the payments for the loan life.  Whew! We the lenders are somewhat safe.

However, let us take a look at the servicer perspective.  With the high unemployment rate, and the go-ahead from the government.  Many borrowers may default or go into forbearance.   Let’s say you are the servicer.  I come to you with 100 loans to buy. And you knowing the unemployment rate, the forbearance dilemma and more job loss on the horizon.  There is no real game plan or confidence of how we will all get back to work as “NORMAL” again.   If I were to put 100 pills on the table in front of you and said 5 of those hundred are laced with cyanide, would you take any of those pills?  Exactly!  This is what the servicers are thinking as they don’t want to be on the hook for any defaults.

So this is where we are seeing servicers go now.   Especially on government loans such as VA, FHA, and USDA or Rural development loans.   Historically these loans have lower credit score criteria and also much less or no down payment requirements.  Lso historically these loans have a higher rate of first payment default or slow payments over the loan terms. Servicers now facing the conundrum of forbearance policies and higher chances of defaults have a remedy.   They would raise interest rates and have borrowers pay higher costs in the form of discount points.  They are saying, “Hey lenders, you want us to buy your government loans?  We will buy them, but we are charging a higher premium and costs to do so.” This way with the increased costs and the yield with higher rates, the profitability is there if the loan performs well which 90% do,   and now build the liquidity to pay the investors is say 10% of the loans go bad or are in default.  

On these government loans, I had several where the interest rate went from the 3.5% where I quoted them, went to 5.5% and paying several thousand dollars extra costs in the form of discount points. The only option I would have is to work with these borrowers to rapidly work on credit scores by paying down or off debt and working other items in their credit profile to raise credit scores enough that they would not be affected by these servicer policy and guideline changes recently. It works sometimes and sometimes it does not if we are against a purchase contract closing date.  I feel so sorry for the borrowers as they had just got stuck in the wrong time and wrong place in the mortgage market in the last couple of months.  

So as you can see these times are uncharted and unprecedented and very unpredictable times.  So, where do I see the market going here in the next 6 to 12 months?  I think the mortgage interest rate will continue to be volatile.  We will see pockets of very low and absurd higher rates at times.  Locking an interest will become an art of watching the market. However, many consumers may miss out if they do not have an active loan application with their lender. Lenders need an active loan application to price out the best interest rate with determining factors such as credit scores, debt to income ratios, loan to value, and other pertinent information.  With this information at the loan officers’ fingertips, a ‘rate watch alert can be set for the client ever monitoring the market and waiting to strike on that low-interest rate.

I see foreclosures on the rise come the beginning of October this year through the first quarter of 2021.  Many of these homeowners that took advantage of the forbearance suggestions will not be able to square up or pay the servicers.   I see these homeowners in a way to avoid foreclosure is to sell the home, not giving up their equity.  If they are to sell and avoid foreclosures proceedings, I am concerned the lenders or guidelines will not allow them to buy again until the foreclosure seasoning timing expires. (3 years for government financing and 7 years for conventional financing)  These homeowners will then be forced to rent.  What happens when we get flooded by ones who want to rent?  Rents go up.  This will now create another market.  Those who were renting and were able to maintain financial stability throughout this crisis will now see opportunities to become homebuyers. 

There will be some very good bargains out there in the home market as I see home prices trending downward as ones who face foreclosure will lower there selling price to extract what equity they can before the bank takes the home to cover all their losses. New construction along with purchase rehabilitation loans will be somewhat nonexistent for the time being.  Home equity lines will tighten their guidelines as well.  

The good news is that there is a lot of pent up equity in homes right now.  Credit card debt has been at an all-time low and home values have been up dramatically since 2009, the great recession. For the savvy, I truly believe this is an opportunity to utilize that home equity, utilize this cash to pay off, pay down, and eliminate debts, lower payments and create a much more comfortable cash out-flow for their families.  Ones may say, I am not rolling my car payment into my mortgage or rolling my credit cards or student loans into my payment.  I’m not paying for that for 30 years.   Remember you are not paying it.  Time is.   The years you have owned the home time and appreciation have taken control and allowed you to pay these debts off.   Time, appreciation and yes inflation are beautiful tools when creating wealth for individuals. 

Applying some simple financial principals and working with true professionals in the industry can really open your eyes to proven strategies that not only protect you from tough times but allow you to ride out these tough times and flourish.   My wife tells me 2 things.   Take the cotton out of your ears and stick it in your mouth,  and prepare for tight times and tight times never come.  Some true words of wisdom.


If you have any questions, comments or concerns please give me a call or click the apply today under my email signature and we can assess your situation