There is justified concern within the investor community regarding the residential mortgage loans currently in forbearance and their ultimate resolution. Although most of the 4M loans in forbearance are in securities backed by the Federal Government (Fannie Mae, Freddie Mac or Ginnie Mae), approximately 400,000 loans currently in forbearance represent collateral that backs private-label residential mortgage-backed securities (PLS). The PLS market operates without clear, articulated standards for forbearance programs and lacks the reporting practices that exist in Agency markets. This leads to disparate practices for granting forbearance to borrowers and a broad range of investor reporting by different servicers. COVID-19 has highlighted the need for transparent, consistent reporting of forbearance data to investors to support a more efficient PLS market.
Inconsistent investor reporting leaves too much for interpretation. It creates investor angst while making it harder to understand the credit risk associated with underlying mortgage loans. RiskSpan performed an analysis of 2,542 PLS deals (U.S. only) for which loan-level foreclosure metrics are available. The data shows that approximately 78% of loans reported to be in forbearance were backing deals originated between 2005-2008 (“Legacy Bonds”). As you would expect, new issue PLS has a smaller percentage of loans reported to be in forbearance.
Not all loans in forbearance will perform the same and it is critical for investors to receive transparent reporting of underlying collateral within their PLS portfolio in forbearance. These are unchartered times and, unlike historic observations of borrowers requesting forbearance, many loans presently in forbearance are still current on their mortgage payments. In these cases, they have elected to join a forbearance program in case they need it at some future point. Improved forbearance reporting will help investors better understand if borrowers will eventually need to defer payments, modify loan terms, or default leading to foreclosure or sale of the property.
In practice, servicers have followed GSE guidance when conducting forbearance reviews and approval. However, without specific guidance, servicers are working with inconsistent policies and procedures developed on a company-by-company basis to support the COVID forbearance process. For example, borrowers can be forborne for 12-months according to FHFA guidance. Some servicers have elected to take a more conservative approach and are providing forbearance in 3-month increments with extensions possible once a borrower confirms they remain financially impacted by the COVID pandemic.
Servicers have the data that investors want to analyze. Inconsistent practices in the reporting of COVID forbearances by servicers and trustees has resulted in forbearance data being unavailable on certain transactions. This means investors are not able to get a clear picture of the financial health of borrowers in transactions. In some cases, trustees are not reporting forbearance information to investors which makes it nearly impossible to obtain a reliable credit assessment of the underlying collateral.
The PLS market has attempted to identify best practices for monthly loan-level reporting to properly assess the risk of loans where forbearance has been granted. Unfortunately, the current market crisis has highlighted that not all market participants have adopted the best practices and there are not clear advantages for issuers and servicers to provide clear, transparent forbearance reporting. At a minimum, RiskSpan recommends that the following forbearance data elements be reported by servicers for PLS transactions:
- Last Payment Date: The last contractual payment date for a loan (i.e. the loan’s “paid- through date”).
- Loss Mitigation Type: A code indicating the type of loss mitigation the servicer is pursuing with the borrower, loan, or property.
- Forbearance Plan Start Date: The start date when either a) no payment or b) a payment amount less than the contractual obligation has been granted to the borrower.
- Forbearance Plan Scheduled End Date: The date on which a Forbearance Plan is scheduled to end.
- Forbearance Exit – Reason Code: The reason provided by the borrower for exiting a forbearance plan.
- Forbearance Extension Requested: Flag indicating the borrower has requested one or more forbearance extensions.
- Repayment Plan Start Date: The start date for when a borrower has agreed to make monthly mortgage payments greater than the contractual installment in an effort to repay amounts due during a Forbearance Plan.
- Repayment Plan Scheduled End Date: The date at which a Repayment Plan is scheduled to end.
- Repayment Plan Violation Date: The date when the borrower ceased complying with the terms of a defined repayment plan.
The COVID pandemic has highlighted monthly reporting weaknesses by servicers in PLS transactions. Based on investor discussions, additional information is needed to accurately assess the financial health of the underlying collateral. Market participants should take the lessons learned from the current crisis to re-examine prior attempts to define monthly reporting best practices. This includes working with industry groups and regulators to implement consistent, transparent reporting policies and procedures that provide investors with improved forbearance data.