Correspondent lenders watch closely as GSEs buy loans with forbearance
Among mortgage industry segments hoping for some relief this week is the market for loans sold to aggregators.
The Federal Housing Finance Agency's move to allow government-sponsored enterprises to purchase single-family loans with forbearance could encourage other private buyers of mortgages to become more active.
But there are questions about how far the FHFA's initiative will go to that end given that the prices the GSEs are offering for those loans are steeply discounted.
"The market was a bit frozen, so it's going to be interesting to see how the aggregators respond to this," said Curtis Richins, president at Mortgage Capital Trading.
Normally, "scratch and dent" investors that buy mortgages ineligible for sale to the GSEs would be interested in a loan with forbearance, but that market had dried up.
Not only have correspondent aggregators been refusing to buy loans with forbearance, one large player — PennyMac — had been requiring sellers to agree to repurchase a mortgage if a forbearance request materialized as far out as 15 days, citing the GSE's inability to buy such loans at the time.
PennyMac still won't buy loans that start out in forbearance but changed its guidelines on Thursday to reflect the GSEs' new purchases in situations where the forbearance materializes after it buys an eligible loan. It also is charging a $1,000 administrative fee for any government or conventional loan that goes into forbearance within 60 days of purchase regardless of whether the loan can be sold to an agency. (The Federal Housing Administration plans to soon draw up a contingency plan to address equivalent situations in the government market.)
PennyMac maintained its previous buyback requirements for cash-out refinance transactions for which a forbearance request is processed post-purchase, as those mortgages remain ineligible for purchase by Fannie Mae or Freddie Mac.
Repurchases are a strong deterrent to sellers.
"It doesn't take too many of those to put a small lender out of business," said Richins.
Nearly 5% of outstanding GSE loans were in forbearance in the Mortgage Bankers Association's latest survey, and that percentage is expected to rise rapidly. But the rate at which newly originated loans in particular are going into forbearance is unclear.
That — in conjunction with difficulties assessing how a high number of coronavirus-related forbearances on GSE loans could affect performance long-term — has made it hard for scratch-and-dent investors to determine what they should pay for mortgages.
But the fact that the FHFA has now set a price for these loans could help to address the question how these mortgages might perform and what they might be worth.
"You were looking at an unsaleable loan before," said Richins. "At least now you know what you can sell the loan for."
However, the discounts the FHFA is imposing on new loans with forbearance are steep — 5% of the balance for loans to first-time homebuyers and 7% for others. If PennyMac's new guidelines for GSE-eligible loans a forbearance appears on after purchase are any indication, the correspondent market may be adopting Fannie Mae and Freddie Mac's pricing for mortgages in this category as well.
"Now lenders can sell these loans but they have to take up a 7% loss on each of them," said Scott Olson, executive director of the Community Home Lenders Association. "It's modestly constructive and sort of a lifeline, but we don’t expect this to completely stabilize the market, and it still may be creating incentives for companies to create underwriting overlays for people at risk of losing their jobs."
Borrowers have the right to up to six months of forbearance for a coronavirus-related hardship upon request on government-backed loans, renewable for one additional half-year period, as a result of the coronavirus rescue package. But that requirement does not technically apply to the period before the sale of a closed-loan directly to a GSE or to an aggregator, because the sale that makes it a government-backed loan has not occurred yet. That opens up the possibility that lenders will take measures to discourage or screen out forbearances at that stage.
"The FHFA buying loans in forbearance really helps the secondary market," said Quyen Truong, former assistant director of the Consumer Financial Protection Bureau and a partner at law firm Stroock & Stroock & Lavan. "However, the conditions attached, particularly the hefty fee that would be applied for the GSEs to purchase those loans, still leaves an adverse impact on the secondary market for loans with forbearance activity."
"The FHFA's shift makes the market work a whole lot better," she added. "But it still imposes extra costs on lenders for providing forbearance, with perhaps some unintended consequences for the market and for consumers."