After COVID-19, ‘Un-Pausing’ Mortgage Payments A Daunting Challenge

The bills get delayed, get deferred, and forbearance is the rule of the day.

And then they become due. And for at least some stakeholders in the roughly $11 trillion mortgage market, the ripple effects of trying to chase down payments post-COVID-19 and get documentation in place will be significant, time consuming and costly.

Bloomberg reported Tuesday (April 28) that “chaos” will start once the coronavirus pandemic is over, when it’s time for payment activity to resume and mortgage servicers work through a backlog that might stretch back over a series of months. Forbearance, after all, will last a finite amount of time, and as mandated by the $2.2 trillion stimulus CARES Act that was approved by Congress last month, mortgage companies are required to let borrowers delay as many as six months of payments.

The devil is in the details, however, and documentation has been proved to be a rather low hurdle when it comes to granting forbearance. Property owners needed only to say that they faced hardship in the wake of the coronavirus to get approval for the delays.

But then what happens when these same property owners, on the other side of the pandemic, gear up to start paying? To get a sense of the scope of that issue, consider the fact that, as noted by Bloomberg, mortgage information service Black Knight has estimated that 6.4 percent of borrowers are in forbearance plans. Depending on the loans’ backers — Fannie Mae, Freddie Mac or Ginnie Mae — there are different ways to repay forbearance. In some cases, the forbearance shifts into a second lien on the property; in other cases, the forbearance can be paid off over 12 months.  In still other cases, as reported by Bloomberg, firms have told at least some borrowers that the forbearance will be due as a lump sum.

All in all, making the transition from forbearance to repayments mean that borrowers will look to modify their mortgages.

Post pandemic, requests for loan modifications could prove challenging for agencies such as Fannie and Freddie, which buy modified loans out of mortgage backed securities.

“That process can hurt MBS prices, as mortgages are prepaid faster than expected,” reported the newswire.

In an interview that appeared in this space earlier in the week, Figure Technologies CEO and Co-Founder Mike Cagney told Karen Webster that the U.S. mortgage market remains inefficient. The recent volatility in the credit markets have shown that “you have no idea if the mortgages that you bought, whether those people are paying or not.”

Fannie and Freddie, for example, sell what in industry parlance are “55 day” securities, which mean that investors in mortgage backed securities must wait nearly two months to get their cash. Transparency and discovery are lacking. We at PYMNTS contend that the administrative hurdles of tracking forbearance and setting repayment plans back into force will only prove additional headwind to a liquid and efficient market.

Cagney noted to PYMNTS this week that there’s no convenient way to flip a switch and get back to normal. On the agency side of the mortgage industry, as many as 5 percent to 10 percent of mortgage holders are currently in forbearance or requesting forbearance, he said.

For now, it’s hurry up and wait before the paperwork deluge, and the race to catch up with the backlog.