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Payment Deferral: A Critical Loss-Mitigation Tool

Throughout the pandemic, forbearance plans have played an important role in providing mortgage relief for homeowners as they dealt with COVID-19-related hardships impacting their finances. These include job loss, reduced income, and illness. But what are homeowners to do after the forbearance ends? A new home retention solution, COVID-19 Payment Deferral, was introduced early in the pandemic to bolster the loss mitigation toolkit. This program was designed to meet the needs of homeowners who have resolved their hardship but can afford to resume their pre-pandemic payments.

The total COVID-19-related forbearances on Freddie Mac-owned mortgages has reached almost 800,000, and 76% of homeowners who started a COVID-19 related forbearance have since exited. Slightly more than 38% of those who exited a forbearance plan have received a Payment Deferral as a solution to their delinquency. However, of the active forbearances remaining, nearly half are due to expire in the fall and those homeowners will need a solution. While repaying the missed payments immediately after forbearance is the best option to avoid having a lump sum included in the final payment, the truth is that most homeowners cannot afford to do that—this is the reason the Payment Deferral was created and works so well.

“Nobody in the mortgage industry or the value chain benefits from uncertainty and disruption,” said Mike Zarro, EVP of Mortgage Servicing at Truist, during the “Home Starts Here” podcast. “What the COVID-19 Payment Deferral allowed us to do is give a large group of homeowners certainty very quickly.”

Simple for Homeowners

  • Brings the mortgage current immediately
  • Keeps the monthly principal and interest payment the same
  • The deferred amount does not accrue interest
  • The loan term (number of years) does not extend

A homeowner who was current, or up to 60-days delinquent, at the start of the COVID-19 pandemic may be eligible for a COVID-19 Payment Deferral. It allows them to continue making the same mortgage payments they had before forbearance by deferring the delinquent principal and interest amounts—without increasing cumulative interest payments, extending the mortgage term or the number of payments. Basically, the interest due for the remainder of the loan would be the same whether the homeowner reinstated or took a Payment Deferral. All in all, Payment Deferral is easier for the homeowner to understand and is more affordable than other available options.

Simple for Servicers

  • Fewer eligibility requirements
  • Minimal documentation needed from the homeowner, if any
  • Operationally easy to implement as the monthly payment, interest rate, and maturity date of the mortgage do not change

As we enter a post-pandemic world, Freddie Mac is focused on supporting the housing industry with innovative programs and tools to advance sustainable homeownership. One tool that will speed up mortgage resolution for servicers (and homeowners), is Resolve, an integrated default management platform. A servicer can send workout requests like the COVID-19 Payment Deferral to Resolve via an application programming interface (API) solution, which returns instant eligibility decisions and data for each loan. Direct integration via API results in a quicker response to the homeowner on post-forbearance options.

Simple for the Investor

  • Reduces potential credit losses
  • Fills a gap between repayment and a modification
  • Does not increase MBS pre-payment speeds

Success in a Time of Need
“We’re going to continue to see the need for deferral decisioning,” said Bob Hora, SVP, Default Operations at Cenlar, during a “Home Starts Here” podcast. “That continued expansion of treatments allows us to streamline our processes through automation. The Payment Deferral decisioning—that’s a wonderful, streamlined option for homeowners. It also provides servicers a way to process in an automated fashion.”

When faced with an unexpected crisis, homeowners need smart, reliable solutions for mortgage relief so they can remain in their home and avoid foreclosure. As many 18-month forbearances come to an end soon, Payment Deferral will establish itself as a flagship program for resolving COVID-19-related delinquencies. Payment Deferral has proven to be a successful post-forbearance solution to sustainable homeownership during the pandemic.

 

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About Author: Kevin Palmer

Kevin Palmer is SVP for Single-Family Portfolio Management, where he has broad responsibility for the single-family portfolio, including Freddie Mac’s guarantee book of business, pricing and analytics, servicing, and REO. He also leads Single-Family Credit Risk Transfer, including Freddie Mac STACR securitizations, ACIS reinsurance, Whole Loan Securities, and front-end risk transfer offerings.
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