Is The Great Recession Already Here? Forbearance Might Lead To Wave Of Foreclosures

Though Congress mandated lenders grant consumers forbearance on mortgage payments, lenders predict chaos once the coronavirus pandemic has been tamed as confusion over how payments will be made up replaces desperation.

The $2.2 trillion CARES Act adopted one month ago mandated consumers with mortgages backed by the federal government – about 62% of all first lien mortgages – be allowed by delay their monthly payments at least 90 days and, possibly, as long as a year. The payments are to be made up later through a payment plan without penalty. The payments also could be added to the end of the loan as a second lien or paid back as a lump sum.

The industry is warning of possible chaos in six months when homeowners try to resume payments as confusion about policies, paperwork problems and delays could lead to foreclosures, much like the problems that emerged following the 2008 financial crisis.

The Mortgage Bankers Association said Monday nearly 7% of consumers have asked for forbearance, with the percentage of mortgages backed by Ginnie Mae at nearly 10%.

“Forbearance requests fell relative to the prior week but remain roughly 100 times greater than the early March baseline,” Mike Fratatoni, the association’s senior vice president and chief economist, said in a press release. “While the pace of job losses has slowed from the astronomical heights of just a few weeks ago, millions of people continue to file for unemployment. We expect forbearance requests will pick up again as we approach May payment due dates.”

“No one’s ever seen anything like this. Servicers are definitely being strained,” Mat Ishbia, chief executive officer of United Wholesale Mortgage, told Bloomberg.

A coalition of mortgage and finance industry leaders pleaded with federal regulators for cash to keep the mortgage system running.

“The scale of this forbearance program could not have been foreseen by mortgage servicers, or fully anticipated by regulators ... it is therefore incumbent upon the government to provide a liquidity facility for single-family and multifamily servicers. ... Any further delay could lead to greater uncertainty and volatility in the market,” the coalition said in early April – before the scope of layoffs was apparent.