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August 28, 2020

Forbearance End is Near - Are You Prepared?

EXCERPT: There are a lot of loans and mortgages coming to the end of their forbearance period after millions of Americans sought financial assistance. Lenders would be wise to sell a portion of their portfolios to minimize the overall strain that this may place on servicing departments.

Millions of Americans applied for mortgage forbearance since the pandemic hit, and many of these programs are now coming to an end.

Mortgage forbearance programs were made available weeks ago to help homeowners and business owners continue to make mortgage payments despite a lull in income. But the forbearance period is nearing an end, forcing lenders holding these assets to prepare for what's next.

Forbearance plans allow borrowers to either reduce their payments or skip them altogether. Under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, borrowers with a mortgage backed by the federal government were allowed to ask for forbearance from their lenders.

Financial Assistance Programs Soon Expiring

Unemployment benefits and the various financial assistance programs that have been made available to Americans are soon expiring, which is some cause for concern as uncertainty in the lending industry looms. For the first time since May, the number of mortgages in active forbearance has dipped under the 4 million mark, according to data collected by the McDash Flash Forbearance Tracker from Black Knight Inc.

Approximately 7.4 percent of all active mortgages - or 3.9 million homeowners - were in forbearance as of August 10th. That represents $852 billion in unpaid loan principal, though the cases of mortgage forbearance were down that week from the week before by 71,000 cases.

Nearly three-quarters of active mortgage forbearance loans were extended since the start of the pandemic.

Forbearance in Decline, Prompting Lenders to Make Some Important Decisions

Over the past couple of weeks, forbearance activity has been in decline, with fewer new forbearance requests, renewals, and removals. About 5.4 percent of all government-backed enterprise-guaranteed loans and 11.5 percent of all FHA and VA loans are in forbearance plans, according to data from Black Knight, as well as 7.9 percent of loans in bank portfolios or private-label securities.

Mortgage servicers have been helping borrowers and the housing finance system as a whole by offering forbearance and advancing funds to investors when millions of homeowners are now in forbearance. But in order to keep the market stable throughout this pandemic and to help keep consumers out of a financial predicament, loan servicers must have access to interim financing to continue doing what they're doing.

Many borrowers have requested an extension to their loan forbearance as Americans continue to struggle with a drop in income due to lost jobs and closed businesses through the pandemic. 

Uncertainty will likely continue over the coming weeks. For starters, no one knows how much longer this pandemic will last. Even though the economy is opening back up and people are going back to work, there are plenty of signs that suggest the crisis is far from over. In addition, it's difficult for lenders to know how many consumers who received forbearance actually needed it. So many unknowns means that it will be nearly impossible to determine what borrowers will do when their forbearance expires.

Lenders Encouraged to Sell Off Certain Loan Assets to Hedge Against Risk

Given this uncertainty, financial institutions holding these loans may want to be prudent and take steps to hedge against risk. One thing is certain: there are many mortgages reaching the end of their forbearance period, which will put a strain on servicing departments. In this case, lenders may want to consider selling a portion of their loan portfolios, and Garnet Capital can help with that.

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