With that number expected to double, servicers are already considering the impending capacity restraints
During its monthly call with investors last Friday, Fannie Mae revealed that over one million of its borrowers are already in forbearance. Federal Housing Finance Agency Director Mark Calabria had earlier estimated that the total number of GSE mortgages in forbearance in May would be around 1 million, but with Fannie blowing past that number on its own, questions are now being asked about the discrepancy between FHFA’s figures and the actual tally and what the massive number of forbearances will mean to the lending space going forward.
Fannie Mae CFO Celeste Brown said in the call that while approximately seven percent of the GSE’s single-family loans are in forbearance, its “allowance in the quarter reflects uptake of 15,” or double the current level. “Uptake could be higher if economic conditions are worse than our forecast,” she continued.
The seven percent forbearance rate Fannie is experiencing tracks closely with competing data. According to Black Knight, 7.3 percent of all mortgages were enrolled in a forbearance program as of April 30. On May 4, Mortgage Bankers Association’s latest Forbearance and Call Volume Survey found that 7.54 percent of servicer portfolio volume was in forbearance as of April 26. MBA estimates 3.8 million homeowners are now taking advantage of forbearance plans, representing an ungodly $841 billion in unpaid principal.
The disconnect between Calabria’s assumptions and what’s playing out in the mortgage space has caused anger in the industry. MPA was told on background that the inaccurate projection is hurting lender confidence in both the FHFA itself and the Agency’s ability to guide lenders through the remaining COVID-19 tumult. Mortgage Bankers Association president David Stevens recently told Housing Wire that comments Calabria has made are reflective of “his lack of experience in the business” and that the Director is “being naive, and putting the housing finance system at risk.”
But BSI Financial Services senior vice-president of sales Allen Price, who spent a decade at the Agency, says the discrepancy could also be related to the unprecedented, model-busting nature of COVID-19.
“I think running those models now, trying to forecast what population will move into forbearance, it’s a little bit more tricky,” Price says. “Typically, you use historical data to build a model and you then overlay that historical data with some assumptions to get the output. In this scenario, there is no ‘historic’ data which you can really apply. It is very difficult to have a model be remotely accurate or precise when you don’t have a baseline of historical data by which you can start to extrapolate.”
For servicers, forbearance is one thing, default is another
Despite the disagreement over forbearance numbers, there is one fact the industry can agree on: many of these loans are going to turn sour. Price expects that between 15 and 20 percent of these borrowers, because of the inability of their employers to rehire them once COVID-19 subsides, will go into default.
Servicing those loans is going to mean major capacity constraints, particularly at smaller servicing companies. Price says lending agencies are already directing certain servicers to move their assets to their larger, more stable counterparts to ensure an adequate response to the impending wave of defaults.
“You’re not seeing articles on that, but we’re seeing it in real time,” he says. “Fannie and Freddie won’t say, ‘Send it to Cenlar,’ What they will do is say, ‘Here’s a list of servicers that you need to think about moving your assets to.’” Because the process must be approved by Fannie/Freddie, Price predicts that firms attempting to move their servicing to smaller companies than they typically deal with should prepare for a possible ‘no’ from the GSEs.
The movement of servicing also means a movement of business. Smaller servicers that see a considerable number loans move off their platform will be forced to endure a significant loss of revenue, particularly those who deal in niche corners of the space that COVID-19 has effectively shut down, such as fix-and-flip financing.
“We saw originators that we’re servicing for literally close up shop because that business was gone,” Price says. “Similarly, for guys that are small who find that their servicing portfolios are shrinking because assets are moving off their platform, when those forbearance loans move into default, there’s going to be a contraction on the servicing side.”
While originators already feeling the COVID-19 pinch can look forward to the easing of social distancing guidelines and a return to some form of normal, Price believes the pain coming for servicers won’t arrive for months, possibly even a year.
“But it’s coming,” he says. “It won’t be profitable for [smaller servicers] to stay in business because those loans won’t be coming back.”
