Servicers may need to process 18,000 forbearance exits a day this fall

A ban that stopped distressed borrowers from losing homes has just ended, but the processing of at-risk loans won’t loom large until September when 18,000 people per business day exit forbearance, according to Black Knight.

To be sure, government-related agencies streamlined some of the new borrower-related protections against home loss and forborne payments are still shrinking on a net basis even with a recent jump in new payment suspensions. However, the sheer number of borrowers who will exit forbearance in the fall, complexity involved in new rules to workflow and timelines for suspended payments are now particularly daunting, according to Black Knight’s analysis. The maximum months payments can be suspended varies based on the date of the initial request and the loan type, and expirations for government-related loans — which dominate the market — generally converge in September and October.

“The numbers exiting this fall are actually bigger than we had thought,” Andy Walden, vice president of market research at Black Knight, said in an interview about the company’s latest monthly Mortgage Monitor report for June. Projections in the study are based on a deeper analysis of June data than in its earlier First Look report.

Not only is the number large, a lot of the tiered expiration dates concentrate the processing of government-insured or guaranteed loans. These tend to have characteristics indicative of higher foreclosure risk, such as lower credit scores or higher combined loan-to-value ratios.

Because of forbearance, additional Consumer Financial Protection Bureau protections that begin Aug. 31, long processing timelines, and Federal Housing Finance Agency policies that bridge the gap between the end of the ban and the beginning of the CFPB’s new rules, many foreclosure actions on owner-occupied properties won’t really get underway until 2022, Walden said.

Roughly 1 million people will still be seriously delinquent when forbearance expirations kick into high gear this fall. While the overall delinquency rate is in line with historic averages, the number of loans late by 90 days or more is four times what was seen pre-pandemic.

How many seriously delinquent borrowers recover could depend on the Treasury’s $9 billion Homeowner Assistance Fund and in a scenario where the states charged with distributing the HAF money allocate 100% of it to missed mortgage payments, around 30% of the increase since the pandemic would be covered nationally, according to Black Knight.

The dollar amount of missed payments compared to pre-pandemic has roughly doubled, rising to $64 billion from closer to $32 billion. States have discretion related to how the money can be used to homeowners’ benefit, so it’s unlikely they will solely to remedy missed payments.

As with separate relief for tenants, the amount of assistance available to address homeowner hardships varies by state in ways that mean the money will go further in some jurisdictions than others, Black Knight found. For example, in some states the minimum $50 million will entirely cover the amount to which missed payments have exceeded pre-pandemic norms. In states like New York and Hawaii just 9% to 10% will be covered, Black Knight found in its analysis.

Differences by state exist because the money has been allocated based on delinquency and unemployment numbers, but the dollar amount of payments missed are higher in certain states like New York and Hawaii, Walden noted. In addition, when the money will reach low- and moderate-income homeowners and who it will reach is in question. States are just starting to turn in their plans for distribution.

Newly allowed foreclosures, or deals struck in which borrowers who can’t resume normal or modified payments allow their homes to be sold to satisfy their debt, could eventually add to inventory in a tight housing market. Foreclosures could add half a month of inventory if spread out over the course of a year, according to Moody’s estimates. However, forecasts vary based on the re-performance rate predicted by individual companies — that is, whether borrowers can avoid a foreclosure or home sale at the end of their forbearance plan by moving missed payments to the end of their loan or getting terms modified, Walden said.

If the 4,000 to 5,000 foreclosures per month processed during the ban return to their pre-pandemic level, they could eventually run at a much higher rate.

Returning to normal will take time, particularly in states where foreclosures require a court process and because consumer protections like forbearance are in place, but eventually it could add to inventory, said Walden.

“In my opinion, it’s not likely to fully make up for the deficit that we have, but it could be a move in the [that] direction,” he said.