Freddie Mac has published research examining the
characteristics of borrowers who took advantage of the availability of
forbearance plans in the early part of the COVID-19 pandemic. Mortgage forbearance
temporarily removes the obligation for borrowers to make their monthly mortgage
payment. Forbearance plans are typically used by borrowers who experienced a
sudden loss of employment, a reduction in income or damage from a natural
Freddie Mac looked at internal loan-level servicing
information on forbearance of its mortgages during three different periods,
comparing COVID forbearance rates from March to June 2020 against a baseline period
running from January 2019 to February 2020 and the 2017 storms and recovery from
August to December 2017. For that later period only loans eligible for disaster
related forbearance programs were included. The analysis is restricted to 30-year fixed-rate
mortgages, which were current and not in forbearance the month prior to the
start of the observation period.
analysis found the forbearance rates in the COVID period were similar in level
to those experienced in areas impacted by the 2017 storms, 5.6 percent, and 5.8
percent, respectively. The forbearance rate in the Baseline period was only
0.09 percent despite the much longer time horizon.
While loans with high
loan-to-value (LTV) ratios are more likely to be in forbearance, almost all
loans in forbearance have positive equity. However, there was a significant
difference in the rates using both credit scores and debt-to-income (DTI) ratios.
consistently declined for borrowers with higher FICO scores. During the COVID-19
period, the forbearance rate for borrowers with the highest FICO scores (800+)
was 2.0 percent while the rate for those with scores below 620 was higher by a
factor of 5.6, 11.1 percent. For the Storm period the increase factor was 13,
from 1.3 percent at the high end to 17.4 percent at the low end. A factor of 18
prevailed in the Baseline period with the rate going from 0.02 percent to 0.36
Rates were generally higher
among borrowers with high DTI. COVID era forborne borrowers with DTI above 46
percent had a rate three times higher at 8.3 percent than those with DTIs below
25 percent. In the Storm period the low DTI scorers had a rate of 3.5 percent
compared to 7.2 percent for the higher group. The increase factor in the
baseline period was 2.2, from 0.05 to 0.11 percent.
Freddie Mac also found
that borrowers with a higher monthly payment were more likely to enter
forbearance during the both the COVID-19 and 2017 Storm periods.
The company says the
availability of forbearance lessened mortgage defaults. Without forbearance, many
households may have faced foreclosure or been forced to sell their homes. Such
forced sales could have depressed
the housing market, leading to further defaults.
provides liquidity to households and plays a vital role in mitigating the
damage to homeowners during times of crisis whether it be a hurricane, wild
fire, or health epidemic,” said Sam Khater, Freddie Mac’s Chief Economist.
“Research on this topic is important because it will help us prepare for the
next several months as we continue to navigate the COVID-19 pandemic, and