Procrastination trumps forbearance as a foreclosures prevention methodology in GSEs

Almost a year ago, the passage of the CARES bill made the postponement of payments the predominant form of foreclosure prevention used by government sponsored companies. However, a new analysis by the Federal Office for Housing Finance shows that this has changed.

The fourth quarter figures published in the Foreclosure Prevention report show that 44% forbearance gives way to 51% deferral as this is the main type of foreclosure prevention that the GSEs use. With the deferrals introduced in 2020, consumers can easily tackle missed payments until the end of their credit.

The trend bodes well for bad loan results, backed by major government mortgage investors Fannie Mae and Freddie Mac.

"The forbearance percentage at GSIs is real and hopeful, but let's get it in after June and see if it changes," said Jane Mason, CEO of Clarifire, a mortgage technology provider focused on operations with distressed Specializes in lending.

The recent expansion of Forbearance by the Biden government could affect some borrowers' decisions about whether to stay on repayment plans, and servicers are in the process of re-calibrating their operations for that change, she noted.

Currently, many borrowers appear ready to resume their normal payments, and in response, the frequency with which GSEs forbearance is used to prevent foreclosures is approaching historical norms a little.

For example, after a particularly bad hurricane season in Q4 2017, forbearance made up 37% of foreclosure prevention measures at GSE, so the 44% in Q4 last year is not that far off. Before the pandemic, forbearance was mainly used for natural disasters.

"In 2017, there was a decline in modifications that were indulgent but later reversed to some extent," said Joe Chappell, executive vice president, Covius Settlement Services. Chappell oversees both origins and standard services. "I think we can expect a similar pattern, except that the return take rate has been higher than in the past and the numbers are bigger because the pandemic is national."

However, the direct forbearance numbers among GSEs are not nearly as large as those seen before the pandemic. In this regard, normality is still a long way off.

At the end of 2020, 804,559 GSE loans were in forbearance, which is 2.8% of their single-family business. While that's a drop of more than 1 million, or 3.7%, in the third quarter, it's far higher than the pre-2020 pandemic figure when it was 9,000.

The industry-wide average forbearance rate is roughly 5%. This is evident from the general consensus emerging from the latest weekly numbers from Black Knight and the Mortgage Bankers Association.

Many concerns such as For example, how long custody rights and foreclosures are extended, and uncertainty about ultimate investor results in a broader market where deferrals may not be used, need to be resolved before more normal credit performance is achieved.

"In the larger market, significant numbers of indulgent people are likely to receive a loan modification," Mason said.

That's because some lenient borrowers may have jobs that don't come back or have to work for less. Consumers can only maintain a deferral plan if they can resume their payments before the pandemic.

However, with previous GSEs, loan changes that require payment cuts that are more difficult for investors to absorb than deferrals have been rare.

According to the FHFA report, mods transitioned to single digits in Q4 19 from 62% of GSE foreclosure prevention measures in Q4 19.

While the mod share of the GSEs' efforts to prevent foreclosures after major hurricanes has increased to 78%, the current suspension rate suggests that the cuts may not be as heavily used this time around, Chappell said.

“A year later, the CARES Act looks pretty successful for the GSEs so far. It looks like they have the right tools in place for borrowers and their servicers have been aggressive about reach, ”he said.

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