3 million Americans skip mortgage payments, but Fannie Mae and Freddie Mac will cut mortgage servicers a break

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As the number of Americans requesting forbearance on their home loans rises, Fannie Mae FNMA, -2.77% and Freddie Mac FMCC, -3.73% are relaxing rules for mortgage servicers.

As of April 12, nearly 6% of all mortgages nationwide were in forbearance, according to data released late Monday by the Mortgage Bankers Association. That equates to roughly 3 million homeowners, MBA chief economist Mike Fratantoni said. In a forbearance agreement, a borrower may skip or make reduced payments for the duration of the agreement.

In response, the Federal Housing Finance Agency said Tuesday that servicers will only need to advance scheduled monthly principal and interest payments to investors for four months once a mortgage borrower has entered forbearance. After that, servicers will not be expected to advance scheduled payments while the borrower is in forbearance, regardless of the size of the servicer.

Read more: Are you a homeowner seeking forbearance on your mortgage? Watch out for these red flags

The move aims to bring “stability and clarity” to the $5-trillion housing finance market backed by Fannie and Freddie, FHFA Director Mark Calabria said in the announcement. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment,” Calabria said.

The CARES Act stimulus package guaranteed that all homeowners with federally-backed mortgage could receive forbearance for up to one year, if they are struggling to meet mortgage payments due to loss of income as a result of the coronavirus pandemic. “Forbearance inquiries will likely rise again as we approach May payment due dates,” Fratantoni added.

Read more:Fed’s Bostic says watching closely for signs of ‘unbearable’ stress among mortgage servicers

Because servicers are now required by law to offer forbearance to millions of homeowners, the mortgage servicing industry is facing a crisis. Under normal circumstances, mortgage servicers generally still need to make payments to the investors who own a loan, even if the borrower is delinquent or in forbearance.

The CARES Act did not include any funding for servicers. FHFA’s Calabria downplayed the risk facing servicers, arguing that it wasn’t systemic. The FHFA’s move will reduce some of this strain on servicers whose mortgages are backed by Fannie Mae; Freddie Mac’s policies already only required servicers to make payments to investors for four months if the borrower was missing payments.

Also see:Fannie Mae, Freddie Mac to roll out new mortgage-payment deferral option for homeowners facing financial trouble

The FHFA also clarified that mortgage loans with COVID-19 forbearance will be treated in the same manner as in the case of a natural disaster. This means that these loans will be allowed to remain in mortgage-backed securities pools. Normally, when mortgage loans are delinquent for more than four months they are purchased out of MBS pools by Fannie and Freddie.

But some analysts argued that the relaxed stipulations the FHFA announced Tuesday won’t be enough. Stephen Stanley, chief economist at broker-dealer Amherst Pierpont, wrote in a research note that there will need to be a “broader program of support from either the Fed or the federal government” to absorb losses shouldered by the mortgage services.

Originally Published on MarketWatch

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