The mortgage market has been disrupted by millions of borrowers delaying payments because of the coronavirus. But creditors and veterans of the 2008 financial crisis warn that the real chaos will not begin until the pandemic is over.
The problem is confusion about what will happen when borrowers have to clear these payments. The federal agencies that support most of the market have introduced policies, some of which could require documentation that overloads servers, leading to long waiting times and, in extreme cases, foreclosures.
Industry executives say Fannie Mae, Freddie Mac and their regulator are trying to come up with a program in the coming weeks that could alleviate many of the problems. Mortgage lenders say they expect companies and their security guards to come up with a plan to prevent a repeat of the turmoil that followed the 2008 financial crisis, when confusion and delays prevented borrowers from trying to resume payments.
But unless there are drastic changes, Americans should “expect even more chaos when tolerance ends,” said Michael Stegman, who served as a senior housing advisor during the Obama administration.
A Fannie spokesman forwarded a request for comment to the regulator, the Federal Housing Finance Agency. An FHFA spokesman did not comment on whether there was a correction in the work. A Freddie spokesman did not respond to requests for comment.
The $ 2.2 billion stimulus package, approved by Congress last month, requires mortgage companies to allow borrowers to delay payments by at least six months if they have been affected by the pandemic. Since the government wanted to provide aid quickly, borrowers need only say that they are struggling to receive aid.
Rescue programs during the 2008 crisis required documentation, and borrowers often struggled to get help, as employees repeatedly lost documentation and took weeks or even months to approve loan modifications. Since documentation is not required at this time, owners will not face any problems initially. But officials say they are not sure what will happen when their call centers are flooded in a few months by people ready to resume payment.
Some borrowers said that creditors said that arrears would be due in a lump sum, which is an option, but not a requirement for most people. Housing advocates said they suspected that some employees were consciously trying to dissuade borrowers from seeking tolerance.
“Borrowers are receiving misleading information,” said Nikitra Bailey, executive vice president of the Center for Responsible Lending. “The purpose of this information was designed to scare them.”
Mortgage information service Black Knight reported last week that 6.4% of borrowers have entered into suspension plans. This included 5.6% of those with loans guaranteed by Fannie and Freddie and 8.9% of loans guaranteed by Ginnie Mae.
To add to the confusion, the fact that policies for borrowers differ depending on whether the loan is backed by Fannie, Freddie, Ginnie or owned by a private investor.
The Federal Housing Administration, which secures loans secured by Ginnie Mae, said it will allow skipped payments to be added to the home as a second guarantee. This guarantee does not have to be paid until the mortgage is refinanced or the house is sold.
Fannie and Freddie launched a variety of more complicated options. Borrowers can choose to repay the compensation in up to 12 months, but if they cannot, they will have to apply for a loan modification, which, according to officials, could cause delays and documentation problems like those that occurred after the 2008 crisis.
An FHFA spokesman said Fannie and Freddie’s tolerance payment options “allow employees to work with borrowers to find a payment option that works best for all parties.”