Pub. 12 2021 Issue 1

Pub. 12 2021 I Issue 1 Spring 27 West Virginia Banker Andrea F. Pringle is a financial strategist and MBS analyst at The Baker Group. She began her career in Washington, D.C., where she also earned her MBA from George Washington University. Andrea worked on the capital markets sales and trading desk at Fannie Mae for five years before returning to Oklahoma to work in corporate finance. Andrea joined The Baker Group in 2020, and her work focuses on mortgage products. Contact: 800-937-2257; apringle@GoBaker.com . It is worth highlighting that options 1-3 all present no actual impact to MBS investors. In those expiry paths, the mort- gage 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. Forbear- ance plans have been available to borrowers facing natural disaster hardships for years, which gives us some historical precedence to draw from. However, there are a number of differences between forbearance today and pre-pandemic forbearance that impact borrower behavior. One major difference is the root cause of forbearance. To- day’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 the longer a loan is in forbearance, the more likely it is to experience a credit event (short sale, deed-in-lieu, etc.). That tells us we should expect a large number of credit events as forbearance terms expire this spring. However, there are reasons to believe that loans coming out of forbear- ance now have a better chance of becoming current than ever before. First, today’s housing market is particularly strong. This helps borrowers stave off credit events because they can sell their homes and pay off their mortgages in full, and has already led to substantially fewer credit events than we would otherwise expect to see. Second, the new payment deferral options introduced by the GSEs make it possible for borrowers to transition back to current without coming up with additional cash. These conflicting factors have added to the uncertainty around what will happen when the 12-month terms start to expire. On one side of the equation, the fact that borrowers are spending a longer time in forbearance increases the likelihood of them experiencing a credit event upon expiry. On the other side, borrowers arguably have a better opportunity to avoid a credit event today because of the strong housing market and pay- ment deferrals availability. It is estimated that the share of loans in forbearance that will ultimately experience a credit event could be between 0.7%-7.2%. That is a wide range, but taking that percentage of roughly 5% of all mortgages currently in forbearance does not amount to an alarming share of the agency mortgage universe. Further, because these forbearance terms expire on a rolling timeline, the impact should not overwhelm the market. This is not to say there will be no impact; there undoubtedly will be, but it does suggest the disruption is likely insufficient to warrant substantial changes to investors’ strategies.  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.