Relief for underwater homeowners will be different this time, lenders say
The mortgage industry is insisting that this time will be different.
Borrowers who can’t afford their monthly payments as a result of the COVID-19 pandemic will be treated in a more uniform fashion they were during the last downturn. They will be taken at their word regarding how they’ve been affected, rather than having to provide extensive documentation. And they will not be subject to concerns, as many homeowners were a decade ago, that granting relief will shield borrowers from the bad consequences of their own decisions.
“When people need help, just give them help,” said one person who has been privy to recent discussions among mortgage industry officials regarding borrower relief.
The change in tone is partly a reflection of lessons that the mortgage industry learned the hard way during the Great Recession. During that crisis, many cash-strapped homeowners were bewildered by the complexity of relief programs and angered by their servicers’ operational shortcomings.
The mortgage industry’s new mindset is also a result of different circumstances. Moral hazard — which is the idea that people take greater risk when they are protected from its downside — does not seem particularly relevant in the context of a global pandemic.
Various industry groups have been holding talks this week about the shape of borrower relief, even as Fannie Mae and Freddie Mac released new guidance to mortgage servicers.
On Wednesday, Fannie and Freddie pledged to provide forbearance of up to 12 months to borrowers impacted by the coronavirus outbreak. Borrowers who take advantage will see their obligations suspended until their income bounces back and their payments resume. The forbearance option applies not only to primary residences, but also second home and investment properties.
Following that period of forbearance, borrowers who are not back on their feet may be eligible for loan modifications, under which their monthly payments will be reduced. Fannie and Freddie both said that loan servicers are not required to obtain documentation of the economic hardships that such borrowers have suffered as a result of the pandemic.
Fannie and Freddie also suspended foreclosure sales for 60 days. And they said that borrowers who are in forbearance plans as a result of the outbreak will not be negatively reported to the credit bureaus.
“We are committed to helping families affected by the virus,” Kevin Palmer, a senior vice president at Freddie Mac, said Wednesday in a written statement, “and we are instructing servicers to work with borrowers who are unable to make their mortgage payments.”
Borrower relief needs to be consistent across not only loans guaranteed by the government-sponsored enterprises, but also those backed by the Federal Housing Administration and others, said Ron Haynie, a senior vice president at the Independent Community Bankers of America.
“There can’t be fragmented approaches,” he argued.
Industry groups that have been part of the recent discussions about borrower relief represent banks, mortgage servicers, investors in mortgage-backed securities, mortgage insurers and credit bureaus, according to a source familiar with the talks.
Ed DeMarco, president of the Housing Policy Council, whose members include JPMorgan Chase, Wells Fargo and Quicken Loans, said that housing industry leaders are working collectively to devise a simple mortgage payment deferral plan for those affected by the pandemic.
“We think such a plan can be in place very quickly,” he said in an email, “but we also want to get the details right and be sure were are well-coordinated with all the appropriate government agencies before sharing any further details.”
DeMarco made clear that borrowers who qualify for forbearance will still be responsible for catching up with payments later.
Whether that playbook will suffice may depend on factors that are outside of the mortgage industry’s control, such as the ultimate duration of the economic disruption that has been sparked by the pandemic. Forbearance is a tool that often gets used in response to temporary economic disruptions, such as natural disasters.
Nikitra Bailey, an executive vice president at the Center for Responsible Lending, said that prompt relief can help prevent borrowers’ finances from spiraling out of control.
“Here we have an opportunity to really act immediately, and try to prevent defaults,” Bailey said. “What we’ve seen thus far is that it appears the industry is acting in good faith.”