The Federal Housing Finance Agency (FHFA) announced on April 21 that servicers’ obligation to advance scheduled monthly payments for Fannie Mae and Freddie Mac (the Enterprises) backed single-family mortgage loans in forbearance will be limited to four months. After the four-month period, the Enterprises will stand ready to take over advancing payments to investors in mortgage-backed securities (MBS).
Previously, only Freddie Mac servicers, which are generally responsible for advancing scheduled interest, were limited in that obligation to four months of missed borrower interest payments. Fannie Mae servicers, by contrast, are generally obligated to advance both scheduled principal and interest payments that a borrower does not make, and Fannie Mae policy could have obligated servicers to do so indefinitely.
Rising forbearances—mandated by the FHFA and state and federal actions in response to the coronavirus (COVID-19) pandemic—highlighted this significant difference between the two Enterprises’ servicing policies. The FHFA announcement now largely aligns the two Enterprises’ policies. The announcement appears to leave intact the distinction that Fannie Mae servicers must advance both principal and interest for the four-month period, while Freddie Mac servicers need only advance interest.
According to FHFA Director Mark Calabria, this change will allow all Enterprise servicers, regardless of type or size, to plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payments. The announcement is meant to provide stability and clarity to the $5 trillion Enterprise-backed housing finance market.
Mortgage loans that are delinquent for more than four months historically were purchased by the Enterprises out of MBS pools. This FHFA action clarifies that mortgage loans with COVID-19 payment forbearances shall be treated similar to a natural disaster event and will remain in the MBS pool. This change reduces the potential liquidity demands on the Enterprises resulting from loans in COVID-19 forbearance and delinquent loans.
Consumers appear to be increasingly taking advantage of mortgage loan forbearance options that the FHFA, the Enterprises themselves, the federal CARES Act, and state government actions have mandated or encouraged. Earlier this week, the Mortgage Bankers Association reported that 5.95% of loans in servicers' portfolios were in forbearance as of the week of April 12, while only 0.25% of loans were in forbearance as of March 2.
The Enterprises have required servicers to offer forbearance lasting up to 12 months on the Enterprises’ loans with minimal documentation requirements, so these high forbearance rates created a real possibility of billions of dollars of servicer advance obligations.
This effort by the FHFA puts a cap on servicer liability for forbearances, which, under the CARES Act, could last up to a year. However, the announcement fails to address when servicers will be reimbursed for their advances, and, in our view, does not go far enough in addressing liquidity across the market.
On April 22, the FHFA announced that it is allowing certain single-family loans in forbearance to be purchased and securitized through the Enterprises. Mortgage loans either in forbearance or delinquent are generally ineligible for delivery under Enterprise requirements. However, the FHFA’s action lifts that restriction for a limited period of time and only for mortgages meeting certain eligibility criteria. Eligible loans will also be priced to mitigate the heightened risk of loss to the Enterprises from these loans.
It has been reported that the FHFA is still examining the impact of CARES Act forbearances on the Enterprises’ credit risk transfer transactions.
We discussed the initial steps that the FHFA was taking in response to the COVID-19 pandemic in a previous blog post. Visit our Coronavirus COVID-19 resource page for more information on COVID-19 and other helpful industry resources.