Stabilizing the Housing Market: Deferral Policy Made Permanent Post-Pandemic
As I mentioned recently in my article for Housingwire, on March 29, the Federal Housing Finance Agency (FHFA) announced Fannie Mae and Freddie Mac would enhance their pandemic-era deferral policies which allowed homeowners experiencing hardship to defer up to six months of mortgage payments to be settled at the end of the loan.
Since the pandemic began, the FHFA has already enabled lenders to complete more than 1 million payment deferrals, with roughly a third of all homeowners exiting forbearance via payment deferrals since 2020.
Smart pandemic policies like this stabilized the housing market and, by extension, the economy when it was most needed. Let’s take a look at how these policies have impacted forbearances to date, and I’ll break down the details of deferral exits as well as the other most common ways that homeowners have exited forbearance since 2020.
Simplifying the forbearance process was key pre- (and now post-) pandemic
Since the MBA started releasing regular forbearance data at the start of the pandemic, deferrals have remained a popular exit method, accounting for roughly a third of exits overall.
The most recent data from the MBA shows 25.86% of exits in March 2023 were payment deferrals/partial claims.
As a quick refresher, on July 1, 2020, Fannie Mae, Freddie Mac, and Ginnie Mae made available a payment deferral plan which takes forborne payments and creates a second, non-interest-bearing lien due at payoff or refinance of a mortgage.
The chart above is called Payment Deferral/Partial Claim (the Fannie/Freddie program is called Payment Deferral, and the Ginnie Mae Program is called Partial Claim). Sagent made this program available to the lenders we power on the July 1, 2020, policy effective date.
Homeowners have responded favorably to these solutions, best summarized in feedback such 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 payment deferral was designed to be a simple way to exit forbearance. The efficacy of this pandemic policy was such that the FHFA recently decided to make this a permanent loss mitigation option for homeowners under duress.
Future loss mitigation policies need to be reformed with the homeowner in mind
The MBA’s March 2023 data shows that 16.63% of homeowners who exited forbearance in March did so via a loan modification.
As I touched on in my piece for Housingwire, loan modifications are one of the most common options for providing payment relief for homeowners — specifically, loan mods that either extend the loan’s maturity date and/or reduce their interest rate to the market rate.
However, in today’s high-interest-rate environment, this is not as effective and doesn’t provide the relief many homeowners need to maintain homeownership, hence why this is a smaller percentage of the forbearance exit population than deferrals.
Further loss mitigation policymaking needs to focus on reducing administrative complexity and make scalability attainable so servicers can quickly provide relief to homeowners with consistent, accessible hardship relief regardless of hardship reason or who insures or guarantees the loan.
Additional hardship relief: forbearance exits via reinstatement
Another oft-used forbearance exit method since 2020 has been referred to on the chart above as ‘Reinstatement’. This means homeowners exited forbearance by making a lump sum payment for all missed mortgage payments.
The MBA’s data for March 2023 shows a smaller percentage of homeowners utilizing this option at 11.58%.
It’s possible some of these homeowners requested forbearance because they feared losing their jobs, or a reduction in income due to the pandemic, then decided to make the lump sum payments to reinstate after realizing they were financially secure. Another segment may be homeowners who lost their job initially, but quickly found new employment and re-established income levels to support their payments.
Real-time compliance for real-time policymaking
Our industry has improved materially since the post-2008 years, and we’ll continue to see servicers set a new bar for compliance. The new regulations and policies around loss mitigation programming also provide homeowners with new options to create sustainable homeownership.
COVID hardship programs required services to act quickly and resulted in relief for approximately 7.8 million homeowners with pandemic forbearance programs since March 2020.
This would not have been possible without government insurers and guarantors adapting to offer new options to borrowers like forbearance, partial claim/payment deferrals, and extended-term modifications.
As the MBA has noted in its recent white paper, the current high-interest-rate environment poses additional challenges that require further policy reform and expansion, so servicers have simple, sustainable, and standardized loss mitigation options.
Today’s market underscores the need for further policy reform as servicers expand their loss mitigation toolkits to create sustainable homeownership, with Sagent aligned with these priorities and delivering on the functionality to ensure a successful outcome.
Sagent is the industry’s only mortgage servicing platform with truly real-time data. That means systems can respond to real-time policymaking without ever missing consumer and investor requirements or any compliance details.
This is the future of Servicing, and that is what Sagent stands for. Please reach out and let me know your thoughts on my predictions or your tech stack strategy.