BRACING FOR A DEFAULT SURGE

BRACING FOR A DEFAULT SURGE

By Teresa Blake | KPMG

As I write this article, COVID-19 cases in my home state of South Carolina are on the rise. My neighbor to the north, North Carolina, is experiencing the same fate and is closing some businesses. I know many in this industry survived the crisis from 2008 – 2010. While I expect this moment in time may not be as bad as many fear, I do suspect that we will see a wave of borrowers who default. There are signs of hope but if those who remain unemployed since March 2020 can’t jump into a new career, a default wave is looming on the horizon.

The MBA’s third quarter report noted that forbearance loans remained flat at 5.54 percent. While this is a nice drop from 8.39 percent to 8.18 percent reported as of July 5, 2020, we still have a long way to go. In the summer of 2020, MBA reported that Fannie Mae and Freddie Mac loans dropped to 6.07 percent and Ginnie Mae dropped to 10.56 percent. While all these decreases are a good sign, the rise in COVID-19 cases makes many nervous that a default wave is coming.

WHAT IS DIFFERENT?

For starters, both Fannie Mae and Freddie Mac proposed forbearance programs that ultimately were included in the CARES Act. As a mortgage industry veteran, I am proud they got ahead of it and provided borrowers, who are temporarily impacted, with the ability to suspend payments until they get back on their feet. They can request up to 12 months of deferred payments which never existed during the Great Recession. In 2008, banks often went straight to foreclosure and it was not until much later that we saw short-sales and HARP.

Mortgage rates continued their downward trend, with the 30-year fixed rate falling to 2.9 percent, another record low in the MBA's survey and 63 basis points lower than the recent highs. The refinance share climbed to 72 percent of all origination activity, which shows that borrowers are taking advantage of these historically low rates to bring their payment down. The 30-year fixed rate for FHA backed loans also moved to a new low to 2.97 percent which truly helps first time home buyers afford more in this market.

While the unemployment rate has dropped, it is still too high, at 6.7 percent at the end of November. Rates in some states are not moving down as fast. The MBA study said that more than 14.8 million people in the U.S. reported that they were unable to work because their employer closed or lost their business due to the pandemic. About 3.9 million people were not able to look for work due to the pandemic. While we are excited about the vaccine for COVID-19, we still have a long road ahead.

According to the MBA study, the proportion of student debt borrowers who missed a monthly payment has remained steady since May at around 40 percent. Student loan borrowers are more likely to have missed a rent or mortgage payment in the last six months; for instance,, 10 percent of nonstudent loan borrower mortgagors have missed a mortgage payment since March, whereas over 20 percent of student loan borrower mortgagors have done so. With over 34 million student loan borrowers having missed payments in the second and third quarters, it’s worth watching if there will be auxiliary consequences for the housing and mortgage markets in the coming months.

HOW DOES TECHNOLOGY CHANGE THE GAME?

There are many more tools available today for lenders to leverage than ever. The digital revolution has provided low code or no code tools that make it possible to create a borrower portal for a forbearance application in five days. Bank websites also provide borrowers a significant amount of information about their options and can help guide them through the process. Banks have staffed up to ensure call centers have the capability to provide additional support to address issues technology can’t solve. The tools available in the call centers, like agent assist, also provide the agent options to lay out for the borrower.

While it may not prevent the default wave, it may prevent some from foreclosures. While I can’t personally change the course of this virus, I am hopeful we can help some borrowers from facing this horrible fate.