Although the CARES Act has made it possible for homeowners to defer mortgage payments for up to a year, some 400,000 borrowers are not taking advantage of these forbearance programs and have thus become delinquent, estimates the Urban Institute.
"To take advantage of forbearance, borrowers need only attest to the fact that they have a pandemic-related financial hardship. But not all eligible borrowers have taken advantage of forbearance and have become needlessly delinquent," wrote Urban Institute's Senior Research Associate Michael Neal [1] and Vice President, Housing Finance Policy Laurie Goodman [2].
They continue, "These borrowers may not know they are eligible for forbearance or do know but wrongly fear having to make 'double payments' when the forbearance period ends. To provide information and support to these borrowers, it is important to understand who they are."
Some of their research derives from the latest forbearance report [3]s, initially from the Mortgage Bankers Association (MBA). Here are some of the Urban Institute authors' findings:
- There is no difference in borrowers’ creditworthiness—"We found virtually no difference in the credit scores of the needlessly delinquent borrowers and the 559,506 delinquent borrowers taking advantage of forbearance," they wrote. "Both groups had scores between 662 and 664."
- Needlessly delinquent loans are almost equally likely to be serviced by banks and nonbanks—both sit at approximately 2%, with banks slightly higher and nonbanks slightly lower. "Banks have a lower share of delinquent loans in forbearance than their nonbank counterparts (6.2% versus 3.2%). Some of the differential can be attributed to the securitized dataset we used. Servicers are permitted to buy delinquent loans out of a security when the loan becomes 90 days delinquent. Bank servicers find this practice beneficial, as they have the cash to do the payout, and their cost of funds is lower than the rate on the mortgage. Nonbank servicers often do not have the cash, and their cost of funds is higher than the rate on the mortgage, making the buyout less economic," the authors explained.
- Needlessly delinquent mortgages are equally likely, no matter the year originated—The share remained constant at about 2%, regardless of the year. In contrast, the share of delinquent borrowers taking advantage of forbearance increases with more recently originated mortgages.
- Needlessly delinquent loans have no strong geographic concentration—"But the share of delinquent loans in forbearance varies widely, from a low of 2.86% in Montana and Arkansas to high of 8.86% in New Jersey," Urban Institute reported.
The solution? They say "broad outreach is needed to support needlessly delinquent borrowers." Because, as the above data show, they are not concentrated in any area or under any specific lender, the outreach, UI reported, must be widespread.
"Servicers are an important part of this outreach," Neal and Goodman wrote, "but outreach efforts must also include assistance from consumer groups. Although some government messaging around forbearance options as an alternative has occurred, broader outreach may be in order."
For the entire report and methodology, visit UrbanInstitute.org. [4]