36 MARCH / APRIL 2021 DIRECTORS / SENIOR MANAGEMENT A wave of forbearance expirations expected this spring has investors anxiously awaiting clarity on what it will mean for the mortgage market. COVID-19 forbearance plans introduced by the CARES Act last year make it possible for any borrowers with mortgages backed by Fannie/Freddie/Ginnie to stop paying their loans for a maximum of 12 months due to pandemic-related hardship. The majority of loans in forbearance today entered forbearance in April 2020. With the deadlines on those loans fast approaching, what happens next is front of mind. There are several paths a loan can take when forbearance expires. These paths prioritize keeping borrowers in their homes and minimizing disruption to the mortgage market. For conventional borrowers, the exit paths follow the waterfall pattern as shown in the chart below: Forbearance Expiry Expectations It is worth highlighting that options 1 through 3 in the chart present no actual impact to mortgage-backed security investors. In those expiry paths, the mortgage remains in the pool, and investors continue to receive scheduled principal and interest. Only options 4 and 5 result in prepayments. While we do not yet know how the impending expirations will ultimately play out, we can make some inferences. Forbearance plans have been available to borrowers facing natural disaster hardships for years, which gives us some historical precedence to draw from. There are several differences, however, between forbearance today and pre-pandemic forbearance that impacts borrower behavior. One major difference is the root cause of forbearance. Today’s global pandemic differs from a geographically isolated natural disaster, in that it affects a wider swath of the country and presents a longer path to recovery. Borrowers are staying in forbearance longer today than in the past, and evidence shows that Andrea F. Pringle Financial Strategist and MBS Analyst The Baker Group apringle@GoBaker.com The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member.
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