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REAL ESTATE RESEARCH

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July 2, 2020

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Real Estate Research provided
analysis of topical research and
current issues in the fields of housing

An Update on Forbearance Trends

and real estate economics. Authors
for the blog included the Atlanta Fed's

So far, the principal policy response to the COVID-19 pandemic in the U.S.
mortgage market has been forbearance. On March 18, 2020, the Federal

RECENT POSTS

Jessica Dill, Kristopher Gerardi, Carl
Hudson, and analysts, as well as the

Housing Finance Agency (FHFA) directed the government-sponsored
enterprises (GSE) Fannie Mae and Freddie Mac to suspend foreclosures on

Assessing the Size and Spread of
Vulnerable Renter Households in

Boston Fed's Christopher Foote and
Paul Willen.

single-family mortgages and start offering forbearance and modification plans to
distressed borrowers.1

the Southeast
What's Being Done to Help Renters

In December 2020, content from Real
Estate Research became part of

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into

during the Pandemic?
Examining the Effects of COVID-19

Policy Hub. Future articles will be
released in Policy Hub: Macroblog.

law on March 27, codified the Fannie Mae and Freddie Mac forbearance
programs, and included the government housing agency Ginnie Mae. The act

on the Southeast Housing Market
Southeast Housing Market and

Disclaimer

directed the agencies to grant borrower requests for forbearance "with no
additional documentation required other than the borrower's attestation to a

COVID-19
Update on Lot Availability and

financial hardship caused by the COVID-19 emergency..." In general, servicers
of loans not covered by the law have set up similar forbearance programs.

Construction Lending
Tax Reform's Effect on Low-Income

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What is mortgage forbearance?
Mortgage forbearance means a mortgage lender (that is, the holder of credit risk)
allows a borrower to stop making mortgage payments for a fixed period of time.
During that time, the lender does not charge late fees nor initiate foreclosure
proceedings but does consider the borrower delinquent on the loan. Under
normal circumstances, the lender would report the delinquency and the
forbearance plan to credit bureaus. Under not-so-normal circumstances,

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including natural disasters, lenders often do not report loan status to credit
bureaus. The CARES Act explicitly stipulates that forbearance resulting from the

CATEGORIES

COVID-19 pandemic cannot negatively affect a borrower's credit score, so
lenders cannot report borrowers in forbearance as being delinquent.

Affordable housing goals
Credit conditions

Once the forbearance period expires, the borrower has to make up the missed

Expansion of mortgage credit
Federal Housing Authority

payments. For example, if the lender implements a six-month forbearance policy,
then borrowers would be allowed to defer all payments for up to six months. After

Financial crisis
Foreclosure contagion

the forbearance period ends, the borrower and lender would typically negotiate a
repayment plan that makes the lender whole in the long run but does not send

Foreclosure laws
Governmentsponsored enterprises

the borrower back into distress. During this COVID-19 forbearance episode,
Fannie, Freddie, and Ginnie Mae must provide borrowers affordable repayment

GSE
Homebuyer tax credit

options, such as converting the arrears into a partial claim, which is a noninterest-bearing second lien due at termination of the loan.

Homeownership
House price indexes

Forbearance is meant to provide short-term relief to financially distressed

Household formations
Housing boom

borrowers without inducing moral hazard by borrowers who do not need
assistance. Since no debt is forgiven, the policy, in theory, should not appeal to

Housing crisis
Housing demand

borrowers who are not liquidity-constrained. Nevertheless, some empirical
evidence
indicates that some borrowers may be willing to engage in this

Housing prices
Income segregation

"strategic forbearance."

Individual Development Account
Loan modifications

While an acceptable exit strategy exists for borrowers, it is contingent on
employment and income being restored before the forbearance period ends. For

Monetary policy
Mortgage crisis

mortgage servicers, the magnitude of forbearance take-up is crucial to their
liquidity—especially for nonbank servicers.

Mortgage default
Mortgage interest tax deduction

A liquidity squeeze arises because mortgage servicers must advance scheduled

Mortgage supply
Multifamily housing

principal and interest payments to investors regardless of whether the borrower
is paying. In addition, servicers must also pay tax and insurance payments.2

Negative equity
Positive demand shock

Either the borrower or guarantor will eventually reimburse the servicer, but in the
short run, servicers must have sufficient liquidity to be able to bridge this gap.

Positive externalities
Rental homes

Such a squeeze is especially acute for nonbank servicers who not only are
relatively thinly capitalized but also do not qualify for liquidity support programs

Securitization
Subprime MBS

that have been set up for banks. While this was a concern early in the pandemic,
the GSEs and Ginne Mae have implemented polices that have helped to

Subprime mortgages
Supply elasticity

alleviate liquidity concerns of nonbank servicers.3

Uncategorized
Upward mobility

Forbearance take-up rate

Urban growth

In March, estimates of the fraction of households that would use forbearance in
the coming months varied widely. On the one hand, optimists believed

forbearance take-up would be fairly low because the CARES Act called for a
generous increase in unemployment insurance benefits, which should provide
many unemployed households with enough income to continue making
payments. For example, FHFA director Mark Calabria estimated that only about
2 million GSE borrowers—a take-up rate of less than 5 percent—would seek
forbearance.4
On the other hand, pessimists believed the numbers would be significantly
higher. Laurie Goodman of the Urban Institute predicted that close to 12 percent,
or 5.75 million borrowers, would request forbearance, and Mark Zandi of
Moody's Analytics predicted that around 15 million households, or roughly 30
percent of mortgage borrowers, would miss payments.
To gauge the extent of forbearance, the Mortgage Bankers Association (MBA)
recently initiated a weekly Forbearance and Call Volume Survey of its members.
The survey provides a lagged picture of forbearance rates. The latest survey
covers more than three quarters of first-lien mortgages, so we believe it is
representative of the overall market.
The earliest data from the survey indicate that as of March 8, 2020, the
forbearance rate on all loans was below 1 percent, with both Ginnie Mae and
Fannie/Freddie loans having forbearance rates of less than one quarter of 1
percent. Forbearance rates rose in the month of April, according to the survey
(see the chart). On April 26, overall forbearance rates were at 7.55 percent, up
by more than 480 basis points since the beginning of April. The rate of increase
slowed in May, and the most recent survey (June 21) shows that the overall takeup percentage fell from the previous two weeks, going from 8.55 percent to 8.47
percent and marking the first decrease in the survey.

The data also indicate that there is significant heterogeneity across market
segments. The rate for Ginnie Mae loans, 11.83 percent, has been flat for four
weeks, while the rate for Fannie and Freddie loans, 6.26 percent, has fallen over
the past three weeks. The rate for other loans—including those in private label
securitizations (not government guaranteed) and held on portfolio—is 10.07
percent, which is essentially flat for the month of June. For Ginnie loans, this
means an increase of more than 1,000 basis point since March 8.
Overall, the actual take-up rates are squarely between the optimistic and
pessimistic forecasts.

Looking ahead
The forbearance take-up rates remain elevated, but recently, they have been flat
or have fallen. This pattern is consistent with what we've seen in the labor
markets—the rate of new unemployment claims has been fallen while the
number of unemployed continues to be elevated. The generous increase in
unemployment insurance benefits in the CARES Act certainly has helped takeup rates to be lower than the pessimistic forecasts. But the threat that
forbearance will transition to foreclosure has regained power because the
number of COVID-19 infections is increasing and the CARES Act unemployment
insurance benefits will expire at the end of July.
In future posts, we will discuss what we can and cannot learn from past
forbearance programs that were related to natural disasters, along with the
resolution options available to borrowers who opted into forbearance. For now,
we remain cautiously optimistic that the pandemic will subside and the labor

market will improve before forbearance and unemployment insurance programs
end.
By Kristopher S. Gerardi, associate policy adviser and
economist in the Research Department at the Atlanta Fed,

Carl Hudson, associate policy adviser and economist in the
Research Department at the Atlanta Fed,

Lara Loewenstein

, senior economist and policy adviser at the

Federal Reserve Bank of Boston, and

Paul S. Willen

, senior economist and policy adviser at the

Federal Reserve Bank of Boston

1 [go back]

You can find the official press release on the FHFA website . On the same day, the
Department of Housing and Urban Development (HUD), in consultation with the federal
government, implemented a 60-day moratorium on foreclosures and evictions for single-family
homeowners with FHA-insured mortgages. In addition, HUD encouraged FHA mortgage
servicers to offer various loss-mitigation options to distressed borrowers. The options include
short- and long-term forbearance options and mortgage modifications.
2 [go back]

Servicers of agency loans are required to maintain first-lien status for the GSEs. This
implies ensuring that the borrower has paid all property taxes, whether an escrow account
exists or not, and that, in certain states, the borrower has met homeowner association
commitments.
3 [go back]

On April 10, Ginnie Mae set up a lending facility
that allows servicers
experiencing liquidity issues to borrow funds to make forbearance-related principal-and interest
advances. On April 21, the FHFA announced that it would limit the requirements for servicers
of Fannie and Freddie loans to forward principal-and-interest payments to investors to four
months of forbearance.
Calabria provided this estimate in an April 1, 2020, interview with CNBC
. In the
same interview, he noted that about 300,000 GSE borrowers had already inquired about
forbearance.
4 [go back]

July 2, 2020 in Federal Housing Authority, Governmentsponsored
enterprises, GSE, Loan modifications | Permalink

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