The coronavirus pandemic is triggering widespread use of forbearance plans or "payment holidays" in the U.S. mortgage market. A new report by Fitch Ratings, "What Investors Want to Know: Coronavirus-related Forbearance Plans in U.S.," describes the various programs and potential impact on RMBS ratings.
RMBS documentation is likely to be silent on the treatment of COVID-19 related forbearance plans. Often the only reference to forbearance in the transaction documentation will be limited to treatment of forborne principal as a result of loss mitigation efforts of a servicer. Payment forbearance, or a "payment holiday", has a different meaning and treatment in RMBS.
Missed payments as part of payment forbearance plan that are deferred as a lump sum payment due at maturity may be deemed a modification by the servicer in PLS transactions. Once modified, the servicer may reimburse it principal and interest (P&I) advances from the principal portion of collections, which could result in permanent write-downs to the bonds to the extent excess spread is not available. The impact on the deals will depend on the number of borrowers needing forbearance, the length of time of the forbearance period, the proportion of borrowers that require loan modification or other loss mitigation and RMBS transaction structural mitigants that limit the impact of advance reimbursement.
Fitch announced its intention to apply new delinquency timing stresses, increased loss expectations, and the potential impact on U.S. RMBS ratings in the exposure draft report, U.S. RMBS Coronavirus-Related Analytical Assumptions. Heavy utilization of COVID-19 related forbearance plans may skew some RMBS performance-related triggers. Additionally, Fitch may adjust its analytical assumptions as more information becomes available.
Originators are increasingly bypassing traditional interior property inspections and looking to new guidance provided by government regulators and the GSEs offering temporary alternatives for new loans. Fitch believes that it is appropriate during this period to continue to perform more outside-the-box pre-close appraisals for loans designated to be included in PLS. Fitch believes that exterior-only inspections can be effectively used during the coronavirus outbreak without introducing material additional credit risk in many purchase and rate-term refinance transactions.
Fitch has observed that many originators have updated their non-conforming loan guidelines to reflect the March guidance from the GSEs. Mortgage originators are likely to apply this policy for the duration of the coronavirus outbreak; new loan closings are expected to reflect the revised approach over the coming months.