Coronavirus-related surge in forbearance cash flow concerns eased by feds

Staggering number of Americans unable to pay their mortgages; Lord & Taylor reportedly could file for bankruptcy

Fox Business Briefs: Coronavirus pandemic forcing millions of Americans to delay mortgage payments under a government program; Lord & Taylor reportedly exploring bankruptcy as stores remain shut.

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Lenders servicing Fannie Mae- and Freddie Mac-backed home loans will only have to front the cash for the millions of homeowners in forebearance for four months, federal officials announced Tuesday.

The Federal Housing Finance Agency will establish a four-month advance obligation limit for Fannie Mae scheduled servicing for loans, which is in line with Freddie Mac's guidelines, the agency said Tuesday.

“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market," Mark Calabria, the finance agency director, said in a statement. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment."

Millions of Americans facing coronavirus-related financial challenges put their mortgage payments on pause, the government moved to alleviate imminent concerns among mortgage servicers about cash flow in the industry.  More than 2.9 million homeowners to pause or temporarily reduce payments, or 5.5 percent of all mortgages, as of April 16, according to data from real estate data and analytics firm Black Knight. That amounts to about $651 billion in unpaid principal, which is expected to be paid back in full over time.

Mortgage servicers, however, are generally required to make advanced principal and interest payments irrespective of the borrowers’ payments. Under the new guidelines, they will only be responsible for four months of those obligations.

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Forbearances were part of the multitrillion-dollar stimulus package passed by federal lawmakers that called for lenders, including Fannie and Freddie, to allow people to put their payments on hold if they are experiencing coronavirus-related financial difficulties.

Concerns that the massive jump in forbearance requests could strain the industry have been circulating for weeks.

“It is expected that requests will continue to skyrocket at an unsustainable pace in the coming weeks, putting insurmountable cash flow constraints on many servicers – especially IMBs [independent mortgage banks]," Mike Fratantoni, MBA's senior vice president and chief economist, said in a statement earlier this month.

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Fannie and Freddie will also be instructed to keep mortgage loans that have not been paid for more than four months in mortgage-backed security pools during the forbearance period. Normally loans that are more than four months delinquent were bought out of the pools.

The industry had been calling for the Treasury and the Federal Reserve to create a liquidity facility for servicers.

And while acknowledging that the cap on obligations is helpful, the industry is still hoping that the facility will be established.

"While this news reduces servicers' worst-case cash flow demands considerably, we continue to stress the need for Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it in order to continue to make payments to investors, municipalities, and insurers on behalf of borrowers who have been granted forbearance required under the CARES Act," Mortgage Bankers Association President and CEO Robert D. Broeksmit said in a statement.

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The upside of the forbearance policy is that it could position the market for a quicker rebound once the economic situation normalizes.

“Less foreclosures assure stable home prices and a much better position for the economy to return back to normal after the pandemic,” Lawrence Yun, chief economist and senior vice president at the National Association of Realtors, told FOX Business

However, those who can continue making regular payments should do so, advised Yun.

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