Forbearances are Dropping: What This Means for Homeowners?
Forbearances are declining. What could this mean for future homebuyers?
The United States, at least economically, appears to be steadily returning to a state of normal.
Yes, COVID-19 cases continue to increase in many areas, causing new restrictions on gatherings by politicians who resisted such restrictions in the past. Yes, some major college football teams and players have missed time on the field, a visible signal that the COVID-19 crisis is not over.
But there are positives. The big news, one that will have a direct impact on the virus and the economy, is the announcement of a new vaccine that is reported to be 90% successful.
Even before the vaccine announcement, there were positive signs, especially for the real estate market, mortgages, and the overall economy.
Forbearance rates are a great example. Forbearance is simply a pause in debt payments. If someone is struggling to make their payments due to temporary layoffs, income decline, or the complete loss of a job, they can request forbearance from their lender. This will give them a temporary leave from mortgage payments, hopefully allowing them to regain their financial footing.
According to a November 9th press release from the Mortgage Bankers Association, the rate of mortgage forbearance continues to decline, indicating that fewer people are struggling to make payments.
However, roughly 2.8 million homeowners are in forbearance plans when the information was released.
The report states that only 5.83% of mortgage loans are in forbearance. This is over 1 in every 20 mortgage loans, so it’s not a great number, but it is far better than past numbers. As recently as mid-June, the share of mortgage loans in forbearance was 8.55%. At this time, there were nearly 4.3 million homeowners in forbearance, so it appears we have come a long way towards recovery.
Overall, there appears to be returning jobs and a strong housing market. This has provided the lift consumers need to enjoy a solid income, giving them the ability to repay their mortgages once again.
Forbearances in Decline: What Could this Mean for Consumers and Homebuyers?
There is very little data and information available on how forbearance rates impact consumers, investors, and homebuyers. However, we can make a few judgements on the potential impacts.
These are entirely speculative, but it seems like lower forbearance rates could result in…
Increased Chances of Mortgage Approval
We say it often in these blogs, but it’s such a fundamental concept to the mortgage industry that we’re going to say it again: lending is all about lowering potential risk. Lending institutions, seeking to lower risk across thousands or even millions of loans, make strategic adjustments that reduce the chances of a financial loss from mortgage default. If mortgages are currently seeing a high rate of forbearance, which means the lender is not getting paid, they may increase their standards, requiring greater downpayments or higher credit scores, among other potential adjustments. Overall, this could reduce the chances for the average homebuyer to secure a loan.
However, as forbearances decline, lenders can look across the overall market and assume that future borrowers are also less likely to request forbearance. This could free them up to offer more lenient mortgages.
Potentially Lower Interest Rates
As forbearances decline, the potential risk to lenders also declines. This means that lenders can start to offer potentially lower interest rates.
Interest rates are used as a hedge against risk. Interest rates bring a profit for lenders; they are, after all, the financial motivation for lending money in the first place. But if lots of mortgages are in forbearance, this potential profit is reduced. Therefore, when there is a higher probability of loans going into financial loss, the lender can charge a higher interest rate, hoping that the higher returns brought in by the interest will mitigate future losses.
So if forbearance is low, which means the statistical probability of receiving steady payments is higher, then lenders may be able to attach lower interest rates to their loan products. This is not guaranteed, and interest rates have a much stronger attachment to personal factors like credit scores and debt rations, but it remains a potential reality.
Flexible Mortgage Terms May be Available
Again, because forbearance is low, lenders are experiencing less financial risk. When this is the case, they may be able to offer more flexible and generous terms to their mortgage products. You may find that more options for loan terms such as time frame (15 or 30 years, for example) or adjustable vs. fixed-rate loans may be available.
Investment Loans May be Better
Investing in real estate can bring large potential profits. It can bring a greater risk, but there is also the chance to experience extremely high rewards compared to other forms of investing. However, purchasing property requires a large initial investment, so most people turn to investment-property mortgage loans.
But if forbearances are high, it indicates that people are struggling to make their housing payments. Rental payments, on which most property investors rely, could be in question. It seems reasonable to assume (and we should once again emphasize that this is an assumption) that if a high rate of people are struggling to make their mortgage payments, then a similar rate of people could be struggling to make their rental payments. Lenders can look at the situation and decide to make investment loans harder to attain.
But with lowered rates of forbearance, it seems that investment-property loans would be more available.
Low-Credit Lending May Be More Accessible
Finally, it seems like a fair assumption that if forbearances are low, there would be more options for low-credit buyers. When, across the entire market, there are higher rates of forbearances, mortgage defaults, and foreclosures, lenders may be less likely to offer financing for low-credit buyers, as these loans can expose lending institutions to higher risk.
But once again, as forbearances decline and the economy recovers, it seems like a fair assumption that more low-credit mortgage options would be available.
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