30 NOVEMBER / DECEMBER 2021 DIRECTORS / SENIOR MANAGEMENT New Mortgage Modification Options What will they mean for buyouts? By year-end, over half of governmentsponsored enterprise (conventional) forbearance plans and approximately 70% of Ginnie Mae forbearance plans are estimated to expire. Conventional buyouts have been minimal thus far, but an updated flex modification option could lead to future GSE buyouts. Buyout risk for Ginnie-backed mortgages remains greater than conventionals, especially as a recently introduced COVID-19 modification program for FHA loans could increase buyouts. These modification options, however, are unlikely to drastically impact the market. Buyouts have been a nonevent in conventional mortgages because the GSEs pledged not to buy out loans until they are at least 24 months delinquent (subject to several exceptions, including modification). Additionally, the loss mitigation protocol that conventional servicers must follow prioritizes keeping these loans in the mortgage-backed security. The first step requires servicers to attempt to resolve (“cure”) a borrower’s delinquency through a lump sum repayment of the missed amount. If a borrower cannot make the payment, the second option is to cure through a gradual repayment plan. The third option is a payment deferral, for which missed payments are deferred until maturity. Each of these options results in no change to the underlying MBS – loans stay in the pool, and investors continue to receive principal and interest. The last option to cure delinquency before a loan is referred to short sale or foreclosure is modification, which results in a buyout. Conventional modifications have not been prevalent because they were fairly inaccessible until recently. The GSEs removed their regular modification programs after payment deferrals were introduced in July 2020. The flex modification program proved largely unworkable as well, because it required a loan-to-value above 80, disqualifying those whose LTVs dropped with recent home price appreciation. The Federal Housing Finance Agency, however, recently expanded flex modifications to all qualified borrowers impacted by COVID-19 regardless of LTV, effective Aug. 31, 2021. As a result, modifications may be a viable option for borrowers exiting forbearance in the coming months. Flex modifications allow a longer, 40-year amortization period. They also use the lesser of the borrower’s existing mortgage rate or the prevailing primary mortgage rate, and they allow borrowers to forbear missed payments as noninterest-bearing loans. The result is a reduction of at least 20% in monthly payments, which makes this an attractive path for borrowers to cure delinquency. As a result, we could see an uptick in GSE buyouts related to flex modifications shortly. This does not mean a wave of GSE buyouts is around the corner. The majority of loans exiting forbearance are expected to do so via the payment deferral option. Additionally, loans being modified because they failed to cure in one of the earlier loss mitigation stages would probably have required a buyout due to short sale or foreclosure regardless. Finally, GSE forbearance terms expire on a rolling timeline based on when forbearance was initially requested. 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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