Forbearance report shows ‘pockets of weakness’

Forbearance was flat in the latest month tracked by the Mortgage Bankers Association, but hints of near-term weakness in certain parts of the market are growing more consistent.

The share of loans with forborne payments in November matched October’s 0.7% and loan performance in general was historically strong. However, a pattern of very slight upticks in the first-time buyer segment served by government loan programs is taking shape.

“There were pockets of weakness in the November data, despite the forbearance rate remaining unchanged,” said Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association, in a press release.

The forbearance rate for loans in government-backed Ginnie Mae securitizations, a sector which is dominated by mortgages insured by the Federal Housing Administration, rose 5 basis points to 1.46%. The equivalent for mortgages backed by government-sponsored enterprises Fannie Mae and Freddie Mac inched up by one basis point to 0.32%. In contrast, the forbearance rate for private loans held in bank portfolios or packaged in private-label securities fell 6 basis points to 0.97%.
The growing consistency in the pronounced forbearance rate for loans in Ginnie Mae mortgage-backed securities is in line with broad expectations that inflation and higher year-over-year borrowing rates will increasingly affect borrowers that use FHA and the Department of Veterans Affairs programs. These borrowers have relatively less of a financial buffer against distress than those in other parts of the market do.

“With many indicators pointing to a recession and higher unemployment in 2023, many of the most vulnerable homeowners will be those with FHA, VA, or other government loans,” said Walsh. 

Multiple indicators in the government sector have shown slight but persistent weakness, she said.

“The forbearance rate for Ginnie Mae loans increased for the fourth consecutive month, and the overall performance of the portfolio declined for the third consecutive month,” said Walsh. “Furthermore, the performance of government post-forbearance workouts also weakened.”

When asked to provide a metric exemplifying the trend, the association pointed to statistics showing a decline in the share of loans that had completed FHA workouts since 2020 and were current. That share was 73.79% at the end of November, compared to 75.47% as of Oct. 31. A year ago, the share was 81.8%. 

The MBA tracked two categories of completed workouts to arrive at these numbers: standalone deferrals or partial claims, and permanent modifications/mods combined with deferrals. It omitted post-forbearance reinstatements from the total calculation. Generally, deferrals allow borrowers to resume monthly obligations and make up forborne payments later, while mods or combos involve a longer term hardship or change in income that necessitates a lower payment when practicable. The share declined in both these categories, but it tends to be higher for deferrals.

Overall, between June 1, 2020 and Nov. 30, 2022, the exit status of loans post-forbearance has been as follows: deferral or partial claim, 29.7%; continued to make payments,18.2%; did not make payments and exited without a plan in place, 17.3%; loan modification or trial mod, 16%; reinstatement, 11%; loan paid off through a refinance or home sale, 6.6%; and other alternatives, 1.2%. Other alternatives include short sales and deed-in-lieu arrangements. In both of these cases, borrowers give up ownership of their homes but do not have to go to a foreclosure process which may be more drawn out and do more harm to their credit histories.

The MBA’s numbers, which come from its Loan Monitoring Survey, are representative of 66% of the first-mortgage servicing market or 32.9 million units. The association has been tracking forbearance rates on a monthly basis since November 2021. The survey replaced a weekly  measure the MBA had previously used when forbearance rates were much higher. Forbearance was most routinely used to address natural disasters prior to the 2020 pandemic, when its use became widespread as a result of the CARES Act.