Recent application and forbearance activity point to an increasing sense of economic certainty among borrowers and homeowners
As the COVID-19 reopening continues in its haphazard and anxious way, the results of two weekly Mortgage Bankers Association surveys, appear to indicate a growing sense of certainty about the future among America’s homeowners and borrowers.
On Tuesday, MBA announced that as of May 17, forbearance activity among the 56 servicers participating in the survey had increased to 8.36 percent, equivalent to approximately 4.2 million homeowners. Any increase in forbearances is troubling, but the pace at which the percentage is rising has slowed considerably over the past several weeks.
“Although job losses continue at extremely high rates, mortgage servicers are reporting only modest increases in the share of loans in forbearance as of May 17,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist in a statement accompanying the survey results.
The share of Fannie Mae and Freddie Mac loans in forbearance showed minimal growth week-over-week, inching up from 6.25 percent to 6.36 percent. But the number of Ginnie Mae Loans in forbearance rose more sharply, from 11.26 percent to 11.6 percent.
“The decline in employment and income is hitting FHA and VA borrowers harder,” Frantatoni said.
But the overall trend is undoubtedly one worthy of optimism. The 20-basis point week-over-week increase in the percentage of total loans in forbearance was the smallest increase MBA has reported since the week of March 9 – two weeks before COVID-19 brought the U.S. economy to a standstill.
“This is very encouraging,” says Arcus Lending CEO Shashank Shekhar. “The fact that we’re coming off the biggest job loss in 90 years and we’re still seeing a slowdown in forbearance, that kind of bodes well for the industry overall, I would say.”
Shekhar is also encouraged by the fact that the forbearance figures are stabilizing so soon after a calamitous April, which saw although more than 20 million Americans file for unemployment. That May’s forbearance numbers didn’t correlate to that spike in unemployment points to an encouraging level of stability at the very outset of the COVID-19 recovery.
The question remains: What is going to happen with these loans if the borrowers holding them are unemployed and can’t return to work at the end of the four-month forbearance period the FHFA has carved out for them? Shashank isn’t yet concerned. He can’t envision a scenario where the FHFA doesn’t extend the forbearance period for homeowners in need, especially in an election year.
“My opinion is that that’s going to last a little longer,” he says. “I don’t see how they can potentially pull the plug on seven, eight, nine percent of the overall portfolio. Of course, if it continues for 12 or 18 months, it’s a different picture altogether.”
Applications up
More good news arrived Wednesday, when MBA released its weekly application survey. Overall, applications increased by 2.5 percent for the week ending May 22. A week before, they declined by 2.3 percent.
“The home purchase market continued its path to recovery as various states reopen, leading to more buyers resuming their home search,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Purchase applications increased 9 percent last week – the sixth consecutive weekly increase and a jump of 54 percent since early April.” Kan added that the average purchase loan amount has increased steadily in recent weeks and is now at its highest level since mid-March.
Conventional loan activity led the way last week, with purchase applications in the space rising by 8.9 percent. Fixed-rate mortgage applications rose a respectable 4.2 percent, but adjustable-rate applications leapt 10.5 percent, possibly because homeowners believe further rate cuts will be seen in the coming months.
“They’re thinking why should you get tied down into a long-term 30-year fixed interest rate if they can get a slightly lower ARM, because they can come back next year and refinance all over again,” Shekhar says.
Government products didn’t fare nearly as well as their conventional counterparts. Applications fell by a total of 2.9 percent, a performance almost identical performance to the previous week’s, driven once again by a decline in refinance applications. Purchase applications rose 3.5 percent, but that was less than half the improvement seen a week before. Shekhar says the growing unattractiveness of these lower quality loans, which many servicers have stopped accepting, may be to blame for the decrease rather than a lack of demand.
The indicators, as positive as they are, are unlikely to result in anything resembling a rapid recovery. The forbearance issue can’t be solved until the unemployment situation improves. The unemployment situation can’t improve until COVID-19 can be deemed contained, if not defeated. That could take a while.
“Given that it’s all intrinsically tied to the pandemic itself, and that we know the vaccine is not coming tomorrow, I personally do not see a V-shaped recovery,” says Shekhar, who adds that the recovery could take another 12 months.
“It will be a slow bounce back. And we don’t know if [the economy] will be back to where it was.”
