In recent weeks, we’ve been tracking how many homeowners are extending their mortgage forbearance period from 90 days to the full 180 days provided for by the CARES Act. Today, we’ll address the top three reasons homeowners have been exiting forbearance, then tie it back to extensions.
The top three reasons in the chart below have consistently accounted for over 50% of forbearance exits since late May. Let’s dive into these patterns and offer some ideas on what may be driving these exit behaviors, and what servicers can expect moving forward.
But first some context: As of August 31, 7.20% of mortgages were in forbearance, which is 3.6 million loans. This is down from 8.55% and 4.3 million loans as of June 7.
1. Exited Forbearance After Keeping Mortgage Current
Since the MBA started publishing data on homeowner exits from forbearance in early May, the largest percentage of exits has been attributed to homeowners who went into forbearance but never stopped paying their mortgage.
In the chart above, this is called Cancel/Stayed Current.
There is no single explanation for this behavior, but here are a few theories:
- Borrowers were concerned about a potential job loss that never materialized.
- Customers misunderstood forbearance or accidentally requested forbearance.
- Customers never turned off auto-payments on their mortgages.
We find this trend to be the most surprising, given the massive spike to approximately 4 million forbearances in March and April. We’ll be carefully watching this number into the Fall months.
2. Exited Forbearance With Lump Sum Payment
After homeowners who remained current, the next largest group exiting forbearance are homeowners who exited forbearance by making a lump sum payment for all missed mortgage payments.
In the chart above, this is called Reinstatement.
Again, it’s possible many of these homeowners requested forbearance because they feared losing their jobs, then decided to make the lump sum payments to reinstate after realizing they were financially secure.
Another segment may be homeowners who were furloughed and then got their jobs back, which allowed them to catch up with their mortgages.
Also notable: These folks didn’t spend the money elsewhere, whether other debts (e.g. auto or credit card) or discretionary spending. They saved it and put it back into their mortgage.
3. Exited Forbearance By Agreeing To Settle Skipped Payments At End of Loan
Since July 1, Fannie Mae, Freddie Mac, and Ginnie Mae have 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. This is the third most common way homeowners have exited forbearance recently.
In the chart above, this 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 policy effective date, and many have begun offering it.
The homeowner behavior at work here can be summarized 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 end of the loan’s life is a payoff via refinance or home sale.
The payment deferral was designed to be a simple way to exit forbearance. The fact that homeowners are taking advantage of it implies that it is working as expected, as you can see in the light grey bars in the chart above.
What’s Next: Forbearance Extensions and CARES II
As we move into September, we continue to watch the number of homeowners re-entering forbearance. That is, homeowners who had once thought they were back on their feet, but in fact could not remain current on their mortgages.
Right now, the number of re-entries remains at just 0.86% of all forbearances, which equates to about 31,000 loans (chart below), but this would signal strain if it rises.
Meanwhile the percent of forbearances that received extensions has spiked to 62.43% of all forbearances. This is a concerning stat, but might be because lenders grant forbearances in 90 day increments while CARES allows for two increments of 180 — so many homeowners may have needed more time in this first cycle.
The next critical date of note will come at the end of September, approximately 180 days after the CARES Act passed. We’ll be watching to see how many homeowners request another 180 days and take advantage of the full 360 days offered by CARES and how many homeowners are ready to exit for good.
For now, all eyes are on Congress and the stalled negotiations surrounding the second CARES Act while that legislative body is on recess. From on the ground in DC, Sagent’s local team will keep you posted.