As of September 20, 6.87% of mortgages were in forbearance, which is 3.4 million loans. This is down from 8.55%, or 4.3 million loans as, of June 7.
We’ve been following this decline closely in recent weeks, along with how many homeowners are extending their mortgage forbearance period from 90 days to the full 180 days provided for by the CARES Act.
Let’s address the top three reasons homeowners have been exiting forbearance and tie this activity back to extensions. Let’s also look at what may be driving these exit behaviors and what servicers can expect moving forward.
1. Exited Forbearance after Keeping Mortgage Current
Since the MBA started publishing data on homeowner exits from forbearance in early May, a large percentage of exits have been attributed to homeowners who went into forbearance but never stopped paying their mortgage.
There is no single explanation for this behavior, but here are a few theories:
- borrowers were concerned about a potential job loss that never materialized
- customers misunderstood forbearance or accidentally requested forbearance
- customers never turned off auto-payments on their mortgages
We find this trend to be the most surprising, given the massive spike to approximately 4 million forbearances in March and April.
2. Exited Forbearance with a Lump-Sum Payment
A surprising number of homeowners are still exiting forbearance by making a lump-sum payment for all missed mortgage payments.
Again, it’s possible many of these homeowners requested forbearance because they feared losing their jobs, but then decided to make the lump-sum payments to reinstate after realizing they were financially secure.
Another segment may be homeowners who were furloughed and then got their jobs back, which allowed them to catch up with their mortgages.
Also notable: These folks didn’t spend the money elsewhere, whether other debts (e.g., auto or credit card) or discretionary spending. They saved it and put it back into their mortgage.
3. Exited Forbearance by Agreeing to Settle Skipped Payments at the End of Loan
Since July 1, Fannie Mae, Freddie Mac and Ginnie Mae have made available a payment deferral plan that takes forborne payments and creates a second, non-interest-bearing lien due at payoff or refinance of a mortgage. Today, this is the most common way homeowners have been exiting forbearance.
The homeowner behavior at work here can be summarized as: “If I had to make a lump-sum payment, I would’ve stayed in forbearance, but because this program lets me defer repayment of missed payments to the end of loan’s life, I exited.”
The end of the loan’s life is a payoff via refinance or home sale.
The payment deferral was designed to be a simple way to exit forbearance. The fact that more and more homeowners have taken advantage of it in recent weeks indicates that it is working as expected.
As we enter October, we continue to watch the number of homeowners re-entering forbearance. That is, homeowners who had once thought they were back on their feet, but in fact could not remain current on their mortgages.
Right now, the number of re-entries remains at just 1.37% of all forbearances, which equates to about 46,580 loans. However, a continued rise would signal strain.
Meanwhile, the percentage of forbearances that received extensions has risen to 68.37% of all forbearances. This is a concerning statistic, but it might attributable to lenders’ granting forbearances in 90-day increments, while the CARES Act allows for two increments of 180 days – so, many homeowners may have needed more time in this first cycle. We’ll be watching to see how many homeowners request another 180 days and take advantage of the full 360 days offered by CARES and how many homeowners are ready to exit for good.
For now, all eyes are on Congress and the stalled negotiations surrounding the second CARES Act.
Matt Tully is the vice president of agency affairs and chief compliance officer at Sagent, a company that helps servicers engage borrowers, earn customer loyalty, lower servicing costs, ensure compliance and increase the value of servicing rights throughout full market cycles.