The Coronavirus Aid, Relief, and Economic Security (CARES) Act offered 12 months mortgage forbearance for COVID-19-impacted borrowers with federally backed residential mortgages—that's about 70% of all 48 million American homeowners with a mortgage. But what about the other 30%.
Karan Kaul, Senior Research Associate in the Housing Finance Policy Center at the Urban Institute, explained why it is more difficult to assist the 3 million or so borrowers with private loans.
“These 14.6 million borrowers may be particularly vulnerable to the economic devastation caused by COVID-19, but providing them the same aid is challenging,” said Kaul. “While those with federally backed mortgages can obtain forbearance under standard terms dictated by … Fannie Mae, Freddie Mac, the Federal Housing Administration, or the U.S. Department of Veterans Affairs, non–federally backed loans are held either in bank portfolios or in private-label securities (PLS) ... The result is that two borrowers with similar circumstances often receive different treatment because different entities own their loans.”
At a recent Urban Institute event focused on the 2.6 million PLS loans, experts explored several economic and legal hurdles to attaining equal treatment for servicing of PLS loans.
Three main issues cause difficulties for private-loan recipients, they said:
Lack of standardization. A particularly critical issue related to lacking standardization and clarity is which entity holds the legal authority to decide the terms of loss mitigation. Where governing contracts provide direction concerning loss mitigation, lack of contract standardization and ambiguous language yield different interpretations of similar language.
Lack of specificity.Private agreements dictate what the servicer is allowed to do but often lack specificity needed to address every possible circumstance. According to Jay Williams, Senior VP at Ocwen Financial, crises like the current pandemic generally are “not covered ... because no one anticipated it ever happening.”
Servicer contractual obligations. Servicers have a contractual obligation to the investor that can conflict with doing right by the borrower and providing CARES Act–type forbearance.
These issues don’t affect agency mortgages because Fannie Mae, Freddie Mac, the FHA, and the Department of Veterans Affairs are the decisionmakers in their respective channels and the government bears the cost of the decision.
Though the most effective policy solution would be to align borrower treatment across non-agency and agency channels, the structure of PLS servicing is fragmented and built on fundamentals that are very different from that of the agency space. Furthermore, Kaplan added, “there are significant differences—and often less generous terms—in the provision of forbearance by several balance sheet holders of non-agency whole loans, who generally have full discretion with respect to the provision of forbearance.”
These challenges in servicing private loans were at the forefront of the Great Recession and caused significant consumer harm. According to Eileen Lindblom, head of non-agency/RMBS at Flagstar Bank, the contracts for newer PLS deals “are much better than they were in the last crisis.”
Kaplan discusses more-detailed possible solutions on the Urban Institute website.