Forbearance followed by Loan Mod

[Andy Mirza]

I've always been on the more optimistic side from the beginning of the coronavirus induced economic downturn. I felt that the economy was going great before and that we'd see a quick recovery once everyone opened back up for business. I predicted in this blog post, that most borrowers would be back on track within a year. I also predicted that the main tool that lenders would use to help prevent default would be forbearances.

There's a huge difference between GSE backed loans and the rest of the loans in the hands of myself and other note investors out there. We're not subject to the same foreclosure moratoriums and mandatory forbearance plans that those entities are required to do. (State laws are different and we're all affected by those.)

I believe that the recovering economy will "fix" a lot of problems of defaulted mortgages and prevent homes from going into foreclosure. It looks like the recovery might not be as quick as I thought at first and that we'll have to work through some economic damage.

I also think that the next big thing will be a tool that lenders and the government used the last time: deferred principal as part of a loan modification.

The economic recovery for some people will take a long time. For those that took a forbearance and are worried about making that lump sum payment in 6 months or a year, I think that the GSE's will start letting them put the arrears on the back end of the loan like they were doing 10 years ago. The deferred balance does not accrue interest but just sits there and is due when there is a payoff.

Forbearance plus deferred principal equals giving people more time to get caught up on their mortgages which equals less foreclosures. That's where I think we're headed.

Thoughts??

[Bob Malecki]

Right, and if Congress does not renew or revise the $600 per week unemployment subsidy at the end of this month, then that loss of subsidized income to unemployed borrowers will exacerbate both loan and rental payment defaults. Pair that with the higher incidence of Covid  rates in the southern states and California as we're seeing, then unemployment could start to skyrocket again due to re-closures of retail businesses. 

With this being an election year, the politicians who are driving the boat are more distracted than usual on their political careers rather than the good the American public. I think we're going to have quite a roller coaster ride through the end of the year.