Servicers of loans in forbearance that are backed by Fannie Mae must advance missed payments only for four months, under a policy unveiled Tuesday to addressing liquidity concerns stemming from the coronavirus.
The four-month obligation announced by the Federal Housing Finance Agency aligns the duration on Fannie-backed loans with that already in place for Freddie Mac. After the four-month period, the two mortgage giants will stand ready to take over advancing payments to investors in mortgage-backed securities.
“Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment,” FHFA Director Mark Calabria said in a press release. “The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market.”
The housing finance system has been grappling since mid-March with how to recoup lost revenue from homeowners who have asked to skip payments. To help homeowners, the FHFA and lawmakers have allowed forbearance periods of between six months to a year on loans backed by Fannie and Freddie.
When borrowers stop paying their mortgage, servicers are contractually obligated to advance principal and interest payments to MBS investors. Unlike banks that have access to federal liquidity facilities, nonbank mortgage servicers rely on financing from commercial banks and private firms.
Servicers maintain liquid reserves to cover these advances for loans backed by Fannie and Freddie — as well as MBS backed by Ginnie Mae — that together make up the majority of the mortgage market.
The FHFA said it is instructing the GSEs to maintain loans in MBS pools for the duration of a forbearance plan. Before the COVID-19 outbreak, loans in forbearance typically were bought out of MBS pools.
