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Fannie and Freddie shift gears on repaying forbearance

| May 15, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Fannie Mae and Freddie Mac have announced new repayment options for borrowers getting COVID-19 mortgage forbearance that should improve the value of MBS pools backed by forbearance principal. The approach should come as good news for mortgage servicers and for investors in credit risk transfers, too.

The enterprises will now defer repayment of up to 12 months of mortgage principal and interest until the mortgage matures, is refinanced, or the property is sold.  The deferred amount pays no interest.  Taxes and insurance are also deferred. This is only available to borrowers affected by COVID-19, and the borrower must be able to resume making their normal mortgage payment. A loan granted payment deferral will not be bought out of a pool, which significantly reduces the risk of a spike in buyouts for borrowers that miss a significant number of payments.  Buyouts come back to investors as prepayments. The prospect of lower buyouts should benefit UMBS TBA and narrow the price difference between Ginnie Mae and conventional MBS.

Without this new program, a borrower would need to begin repaying forbearance immediately after the forbearance term ended.  The GSEs traditionally have offered repayment plans of up to 12 months and required no more than a 50% increase in the monthly mortgage payment.  But repaying 12 payments in 12 months would double the monthly mortgage payment. Under these circumstances, most borrowers taking full advantage of forbearance would require loan modifications and force the enterprises to buy the loans out of MBS pools.  The GSEs had introduced a limited payment deferral program in March, but it had more stringent qualification requirements and could only defer up to two missed payments.  Borrower that were more than 30 days delinquent on March 1, 2020 do not qualify, but this disqualifies very few borrowers in MBS pools.

Today’s announcement significantly reduces the prospect for fast GSE buyouts following forbearance, which has been observed after previous natural disasters.  Ginnie Mae pools have often had much slower speeds after a natural disaster due to the FHA’s payment deferral program, which has long allowed borrowers to defer payment without interest until loan maturity, refinancing or property sale.  If the economy is significantly better in one year, most borrowers that use a COVID-19 forbearance plan should remain in the pool.

Slower prepayments should improve UMBS prices and lower the Ginnie-Fannie swap.  Ginnie Mae pools now may have more buyout risk than UMBS pools, since Ginnie Mae servicers have the option to buy out any loan once they are 90 days delinquent.  Liquid Ginnie Mae servicers, like large banks, might choose to buy out loans even if the borrower will eventually be granted payment deferral.  This is not a risk with UMBS pools, since both GSEs have committed to leaving loans on COVID-19 forbearance in pools.  FHA borrowers are permitted to refinance into a new FHA loan without repaying the deferred amount, but it appears GSE borrowers will need to repay that amount if they refinance.  This could make speeds on conventional borrowers a little slower following forbearance.

The Fannie Mae and Freddie Mac announcements also confirmed that servicers will get reimbursed for any advances at the time any borrower takes a deferral. Servicers previously had concerns that reimbursement would only come through longer repayment plans after forbearance ended.

The deferral option also should ease some pressure on the credit risk transfer market. Loans in forbearance get counted as delinquent by CRT, and high delinquencies can lock out all CRT structures from unscheduled principal. In later CRT deals, high delinquencies can lock out scheduled principal, too.  Cutting off principal would extend the average life of the security. Repayment plans would have kept loans delinquent until full repayment of forbearance. Deferral will return the loan status to ‘current’ and end the delinquency immediately, easing concerns about extension in CRT.

Fannie Mae’s Lender Letter

Freddie Mac’s Bulletin

FHFA News Release

 

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john.killian@santander.us 1 (646) 776-7714

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