Forbearance requests rise while access to mortgage credit falls

Posted by Carrie B. Reyes  Jul 7, 2020 

Forbearance requests rise while access to mortgage credit falls

Nationally, 8.5% of mortgages are in forbearance at the end of June 2020, according to the Mortgage Bankers Association (MBA). Homeowners in forbearance are unable to make their mortgage payments. Their servicer agrees to temporarily forgo an exercise of their rights to pursue foreclosure while the homeowner takes steps to bring the mortgage current.

The share of mortgages in forbearance at the end of June was:

  • 6.3% for mortgages insured by Fannie Mae and Freddie Mac;
  • 11.8% for Ginnie Mae-guaranteed mortgages; and
  • 10.1% for other types of mortgages.

As lenders have begun to lose confidence in homeowners’ abilities to pay, they have started tightening lending standards, making it harder to obtain credit. As a result, the Mortgage Credit Availability Index (MCAI) continued to decline in May 2020, as reported by the MBA.

The MCAI increased fairly consistently from 2012 through the end of 2019. Since peaking, it has fallen sharply, now 32% below the November 2019 peak.

Real estate professionals, brace yourselves

After years of gradually loosening credit, mortgage lenders are needing to quickly adjust to the economic realities of the 2020 recession.

As job losses pile on and incomes are reduced, lenders are requiring greater assurances that homebuyers will be able to make payments. This includes requirements for:

  • more savings set aside in case of job loss;
  • higher credit scores; and
  • larger down payments to demonstrate more skin in the game.

At the same time, mortgage interest rates are enticingly low. Lenders are treading a balance between encouraging homebuyers to continue to originate mortgages (and fees) and ensuring they are avoiding unnecessary risks.

Real estate agents have likely already noticed a new dynamic of homebuyers interested in taking advantage of low rates and increasingly seeing their mortgage applications denied as credit tightens. Since the economy is not rebounding anytime soon, expect to see these mortgage application rejections continue for the foreseeable future, and prepare accordingly.

Home sales have already decreased rapidly, falling 39% from a year earlier in May 2020 alone. This steep cut to agent fees won’t even begin to recover until the pandemic is over and the economy slowly gets back to work — a process likely to begin around 2022 at the earliest. Then, as began in 2012 following the start of the recovery from the 2008 recession, when lenders see stability return to the jobs picture, they will gradually loosen up credit again.

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