Some borrowers who’ve obtained a mortgage are going into forbearance before the loan can be sold by the lender to a government-sponsored enterprise. As a result, the Federal Housing Finance Agency announced Wednesday that for a limited time it will be directing mortgage financing giants Fannie Mae and Freddie Mac (the enterprises) to purchase home loans that have gone into forbearance shortly after closing. The agency says it hopes this step will get the mortgage market moving and help ease home lending as a wave of mortgages fall into forbearance due to the COVID-19 pandemic.
“We are focused on keeping the mortgage market working for current and future homeowners during these challenging times,” FHFA Director Mark Calabria said in a statement. “Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending.”
Banks have been requesting servicing relief and have tightened underwriting standards for new mortgages as more than 3 million loans have fallen into forbearance due to the pandemic. But when homeowners suspend their mortgage payments, servicers are still on the hook for making tens of billions in payments to bondholders. As such, banks have begun tightening underwriting standards. For example, JP Morgan Chase, the nation’s largest lender by assets, last week announced that the majority of new customers applying for a mortgage will need a minimum credit score of 700 and down payment of at least 20% of the home’s value.
Under Wednesday’s announcement, the GSEs will buy loans—for home purchase or refinancing—that go into forbearance within one month after the loan closing. The banks, however, will have to pay 5% to 7% of the loan’s value to sell the loan in forbearance to the GSEs. For a $200,000 loan to a first-time buyer, that could mean the lender will have to pay $10,000 to sell the loan. Some banks could lose money on the loan, but they’ll have to weigh whether they want to hold a delinquent loan in their portfolios.
“The FHFA has identified one of several issues impacting liquidity in the market, and NAR appreciates its efforts on that front, but the FHFA’s actions do not solve the problems hurting average American home buyers and the economy,” says NAR President Vince Malta. “We urge the agency and Director Calabria to continue working toward a solution that will protect American home buyers and our nation’s economic recovery efforts.”
In the past, Fannie Mae and Freddie Mac have not purchased loans in forbearance, since they consider them delinquent. However, the enterprises are chartered by Congress and tasked with maintaining liquidity in the market for real estate investments.
In order for a loan to be eligible under Fannie Mae and Freddie Mac’s new buyback program, the mortgage loan must have closed on or after Feb. 1 and before May 31. The loan must be a mortgage purchase transaction or a no-cash-out refinance. The loan cannot be more than 30 days delinquent.
To help ease lending during this time, the National Association of REALTORS®, along with other housing and banking industry groups, has been calling on financial regulators to create a liquidity facility set up by the Federal Reserve and backed by the U.S. Treasury. The liquidity facility would provide a pool of money that servicers could use to make short-term loans and help ensure the stability of the housing finance market. NAR issued a letter to the Treasury Department on March 27 pushing for greater relief in mortgage servicing.
Source: “Housing Regulator Moves to Ease Crunch at Mortgage Companies,” The Wall Street Journal (April 22, 2020) and “Fannie and Freddie Will Now Buy Loans in Mortgage Bailout Program, in a Bid to Loosen Lending,” CNBC (April 22, 2020)
