recent posting on the Urban Institute’s (UI’s) Urban Wire blog touched on six facts
about the mortgage forbearance option mandated by the CARES Act for homeowners
with federally backed mortgages. Some information came from weekly surveys by
the Mortgage Bankers Association (MBA) and Black Knight and have been covered
extensively here. These include the basis stats; 7.5 percent of all mortgages were
in forbearance as of early August, a percentage that has dropped steadily from
8.9 percent in early June. The share of GSE loans in plans was 5.19 percent,
Ginnie Mae (VA/FHA) loans 10.06 percent and the largest share at 10.12 percent
was among loans serviced for portfolio lenders or private label securities
(PLS). That last number is significant
as PLS are not covered by the CARES Act, a situation that will be covered later
in this summary.
The article, written by UI analysts Jung Hyun Choi and Daniel Pang includes information from the
U.S. Census Bureau’s Household Pulse Survey which found racial disparities in
the financial impact of the COVID-19 on the ability to manage mortgage
most recent Census survey, conducted in mid-July, found nearly 21 percent of both Hispanic and Black households had
missed or deferred the previous month’s mortgage payment, compared with 10
percent of white homeowners and about 13 percent of all homeowners with
payments due. This gap persisted over the duration of all survey weeks, as
Black and Hispanic homeowners continue to be disproportionately burdened by the
pandemic’s impact on employment and financial stability.
The survey also found that fears about mortgage payments are
growing. The federal unemployment insurance payments established by the CARES
Act expired at the end of July and the survey found the share of households
expressing “no confidence” in their ability to make their August mortgage
payment reached almost 6 percent, its highest since the Household Pulse Survey
began. That 6 percent includes 16 percent of Hispanic households and 8 percent
of Black households but just 3 percent of white households.
Both the MBA and Black Knight surveys found about a quarter
of those homeowners in forbearance continue to make their mortgage payments, a
population about which none of the surveys provides much information. However, a
survey by the National Housing Resource Center found that 530,000 homeowners
have become delinquent since the pandemic began despite being eligible for
forbearance. About 57 percent of these homeowners said they did not know about
the forbearance option and 70 percent said they were afraid of making a
lump-sum payment when the plan ends even though that is not a plan requirement.
There were an additional 205,000 borrowers in initial plans
who did not extend them upon expiration, and subsequently fell into
delinquency. There is little known about these homeowners or their decision-making
Choi and Pang say these facts point to the need to both
provide more information to homeowners and to gather more information about
them. There also must be preparation for what happens when forbearance ends.
This includes tracking labor market conditions but also gathering more
information on the financial and demographic characteristics by loan channel of
those in forbearance to help them choose their best option to pay back their
deferred mortgage payments.
This will be challenging but not
impossible. Servicers could provide some of this information, and the Census
Bureau could add a question regarding the household’s forbearance plan status when
the Household Pulse Survey restarts later this year. Together with the variables
about households’ housing payments and demographic and financial characteristics,
the additional question could lead to understanding households who are not
taking advantage of forbearance and give decisionmakers a better sense of what
supports could best meet their needs.
In a separate UI blog piece, Karan
Kaul looked at some of the unique problems involved in forbearance for households
with PLS/portfolio loans, which are not covered by the CARES Act. While better
than 10 percent of the 14.6 million borrowers with those loans have been
granted forbearance, Kaul says providing the same kind of assistance as has
been offered to GSE/FHA/VA financed homeowners is challenging.
Federally financed homeowners can obtain
forbearance under standard terms dictated by the guarantor. However,
PLS/portfolio borrowers receive it with varying durations, qualification requirements
and repayment options. This means that two borrowers with similar circumstances
may get different treatment because different entities own their loans.
Kaul says a recent UI event focused
on PLS loans and the economic and legal hurdles to equal treatment for
servicing them. The event found a lack of standardization in the Pooling and
servicing agreements (PSAs) that spell out servicing, rules, particularly as to
which entity holds the legal authority to decide the terms of loss mitigation.
It can be a particular investor or the servicer, trustee, or bond administrator.
This is problematic because each of these entities may have different
contractual constraints or discretion regarding loss mitigation decisions. Even
where contracts provide direction concerning loss mitigation, there can be
different interpretations of similar language.
Even where PSAs dictate what the
servicer can do, there is often a lack of specificity that addresses every
possible circumstance. This may apply to the current pandemic which is not
covered in most PSAs because no one expected it to happen. A PSA that may allow
forbearance might not specify the duration, eligibility, repayment, or other
terms. It may be difficult to decide how
to divide the reduced cash flows to the multiple PLS tranche holders, how to
handle the repayment of the forborne amount or the value of interest lost until
the arrearage is repaid.
Servicers have a contractual obligation to the investor that can conflict with
doing right by the borrower and providing CARES Act-type forbearance. Should investors
receive diminished cash flows, the servicer could be held liable for damages if
it constitutes a contractual breach.
Kaul says they issues don’t affect
agency mortgages because the GSEs, FHA, and the VA are the decisionmakers and
the government bears the cost of their decisions. In the PLS world, one entity
could be the decisionmaker, but the decision’s costs could be spread among many
others. While agency servicing guides are updated frequently to address new
circumstances as has happened during the pandemic, PSAs are locked once they are
written at the time of origination.
The most effective policy solution
would be to align borrower treatment across non-agency and agency channels, but
the structure of PLS servicing is fragmented fundamentally and different from the
If this sounds familiar, Kaul points
out these PLS loan servicing challenges were at the forefront of the Great
Recession and caused significant consumer harm. While one UI event participant told
Kaul that the PSAs for newer PLS deals “are much better than they were in the
last crisis,” about 1.6 million loans, or 61 percent of the 2.6 million PLS
loans outstanding today, were originated before 2009. Before the Great
Recession, PLS borrowers had weaker credit characteristics and higher default
rates. Since 2009, more stringent underwriting standards have markedly improved
the credit characteristics of PLS loans.
Participants at the UI event offered
several suggestions to break down the structural and systemic barriers that are
causing disparities in borrower treatment.
- Grant forbearance rights to PLS borrowers. The Health and Emergency Recovery Omnibus Emergency
Solutions (HEROES) Act, which has passed the US House of Representatives guarantees
12 months’ forbearance for 100 percent of the market, including PLS loans. This
would give PLS borrowers the same relief as those with federally backed loans.
The Act also includes a liquidity provision to help servicers address cash flow
issues while providing forbearance. The Senate has not taken up the HEROES Act.
- Reestablish loss mitigation infrastructure. Better communication and coordination could provide
borrowers and housing counselors with better access to PSAs so they can
thoroughly understand their options. This could be done by reestablishing Great
Recession infrastructure such as the HOPE Loan Port and HOPE NOW Alliance.
- Increase PSA standardization. Participants supported facilitating standard,
transparent interpretation of PSAs across servicers to reduce variability
in borrower treatment. A bondholder communication platform could
facilitate the efficient flow of information to and from investors and
speed up decision making. But it is also clear that these changes will not