Fannie Mae, Freddie Mac may broaden options for deep distress

Most distressed government-sponsored enterprise borrowers have been able to resume payments by adding those they’d suspended on to the end of their loans. But others will need lower payments long-term, potentially beyond the average 20%-plus payment break the GSEs’ standard modification offers, executives said at a virtual Mortgage Bankers Association event Thursday.

That suggests that even the GSEs, which have among the lowest forbearance rates in the market, do expect to contend with a significant population of borrowers who face steep financial setbacks after the pandemic ends.

“The payment deferral solution was very, very effective. We believe it will continue to be effective in 2021. I think for many of these borrowers, they’re likely to need something more,” said Kevin Palmer, senior vice president, single-family portfolio management, at Freddie Mac.

Freddie Mac plans to deploy the payment break that the standard Flex Modification offers, but Fannie Mae is considering whether something beyond that is needed, said Malloy Evans, its senior vice president and single-family chief credit officer.

“It should be a great solution for a lot of people who have been in forbearance for longer, who may be impacted more deeply and who aren’t able to return to their existing payment,” Evans said. “But we’ve been keeping an eye on Flex Mod to make sure it’s going to be a viable solution for those folks, or do we need to make any tweaks?”

To be sure, not all of the GSEs’ borrowers are that deeply distressed and many have gotten back on track.

For example, Fannie Mae has been able to provide more than 1.3 million forbearances since the onset of the pandemic. As of year-end 2020 over 780,000 exited from that group, 95% of which returned to current or paid in full, Malloy said.

However, broader indicators of delinquencies and forbearance do bear out that while overall incidents of distress are shrinking, there’s also a larger group with 90-day-plus payment suspensions that could have longer-term financial problems.

So as time goes on, exits from forbearance may get tougher, and new options may be needed to handle them, said Palmer.

“The solutions that worked well in 2020 may not work as well in 2021,” he said.