Fannie-Freddie forbearance rule sows fears of mortgage hangover
Homeowners hurt by coronavirus were told they could delay their mortgage payments without facing consequences. Now, some are learning they’re at risk of being shut out of the housing market.
The snafu has been triggered by the hastily drafted $2.2 trillion stimulus bill that Congress passed in March. The law allowed borrowers with government-backed loans to postpone payments for as long as 12 months if they’re dealing with financial hardships stemming from the pandemic. It even specified that mortgage firms must report homeowners in forbearance as being "current" on payments, thus preventing any damage to their credit scores.
But the law didn't address long-standing policies that restrict consumers from getting new loans for a year after their forbearances end. For instance, Fannie Mae and Freddie Mac — the government-controlled companies that facilitate nearly half of U.S. home lending — won't buy such mortgages.
Some borrowers who took advantage of the relief lawmakers provided are now being told that they will have to wait before they can refinance or obtain a fresh mortgage to purchase a home. That’s true even for those who ultimately make their payments on time, as the forbearances are still being noted on some consumers’ credit reports.
The issue is the latest for a real estate market that has been thrown into chaos by the coronavirus economic crisis and lawmakers' decision to let millions of Americans temporarily stop paying their mortgages. The industry and government officials are racing to mitigate the law’s unintended consequences.
Fannie and Freddie's policies don’t contemplate an emergency such as the current pandemic or specify how affected borrowers should be treated, said Raphael Williams, a spokesman for the Federal Housing Finance Agency. The agency, which regulates Fannie and Freddie, is working with the companies to resolve the situation, he said.
Fannie and Freddie spokesmen referred comment to the FHFA.
Ian McDonald, a branch manager with Fairway Independent Mortgage Corp. in Hutchinson, Minn., said his firm recently tried to lend to someone who wanted to purchase a new home. The borrower had his work hours cut back in March and April, but recently had them restored. The individual called his mortgage servicer to ask about forbearance but never actually missed a payment, according to McDonald.
But when a Fairway loan officer pulled the borrower’s credit report, they found that he was in the forbearance program approved by Congress. The borrower rushed to make his May mortgage payment, which wasn't yet due, and told his servicer to take him out of forbearance. Still, McDonald’s company determined it was too late.
"We believe he's ineligible for all loans," McDonald said. "They put this legislation in with good intentions but there wasn’t contemplation of all the ripple effects that are taking place right now in real time."
The National Association of Mortgage Brokers wants lawmakers to get involved. In a Tuesday letter, the trade group told members of the Senate Banking Committee that it believes it violates the spirit of the virus stimulus bill for mortgage forbearance to be disclosed to credit reporting companies, the firms that collect consumers' financial data. NAMB President-Elect Kimber White said in an interview that halting such disclosures would reduce the ramifications of Fannie and Freddie’s forbearance policies.
Fannie and Freddie don't make mortgages themselves. Instead they buy them from lenders and wrap them into securities to sell to investors. Lenders rely on that process to make new mortgages. So Fannie, Freddie and government agencies that backstop loans dictate which borrowers get mortgages.
Part of the issue is that many mortgage servicers, which collect money from homeowners and facilitate payments to mortgage-bond investors, didn't know themselves until recently that borrowers who took forbearance couldn’t get new loans. So consumers may have decided to delay their payments without being told of the potential consequences.
St. Louis-based lender F&B Financial Group has fielded calls from several customers wanting to refinance their loans who didn't know their recent forbearance requests had made them ineligible for mortgages backed by Fannie and Freddie, said owner Chris Fox.
Fox said he discovered himself that servicers were leaving borrowers in the dark after calling the company that handles his mortgage.
"I went through the process with them, and pointedly asked twice, 'So there are no negative impacts from doing this?' and I was told, 'No, sir, go ahead and do it,'" he said.
To address the problem, Fannie and Freddie are considering shortening the time period homeowners are restricted from getting new loans to three months or even fewer if borrowers never missed payments, said a person familiar with the companies' discussions. The issue has taken on some urgency due to concerns that consumers have received forbearance without being informed of the risks, said the person, who asked not to be named in discussing internal deliberations.
If Fannie and Freddie don't take action, the broader economy could take a hit should a substantial number of homeowners fail to secure financing to buy new properties once the pandemic passes, Moody's Analytics chief economist Mark Zandi said. A slump in mortgage refinances wouldn’t have the same negative impact, he said.