Forbearance re-entries rise as borrowers struggle with underemployment

Pandemic-related mortgage payment suspensions fell again on Monday but the percentage of re-entries rose as federal officials finalized transitional directives for forbearance exits.

The total forbearance rate slipped 2 basis points to 3.91% and re-entries rose to 6.2% of all suspended payments, from 5.9% the previous week, according to the Mortgage Bankers Association latest report. The payment suspension rate was last this low in early April last year, when it was 3.74%.

The uptick in re-entries, the Federal Housing Administration’s recent deadline extension, and a separate study that shows income reductions persist all suggest there could be one last rebound in payment suspensions before forbearance ends.

“There are many people that are still sitting in deep distress,” said Makada Henry-Nickie, a fellow in governance studies at the Brookings Institution, and one of the authors of a recent report on distressed low-income homeowners affected by the pandemic.

More than 50% of low-income individuals are working but aren’t making as much as they were prior to the pandemic, according to the June survey by the Brookings Institution, which worked in partnership with SaverLife, a nonprofit that specializes in financial management for low-income individuals. More than one-third of respondents didn’t know forbearance plans were possible. In response, SaverLife and other nonprofits plan to spread awareness before forbearance expires. Currently, initial requests make up 10.7% of all loans in forbearance.

Mortgage servicers have been sending their last rounds of notifications for forbearance to borrowers as they brace themselves for the more complex and costly process of evaluating consumers for loan modifications.

Servicing costs usually rise when there’s more borrower distress in the market, but they’ve been lower because of forbearance and a foreclosure ban due to end in August. That trend will reverse as pandemic-related housing relief unwinds. So while a mortgage company paid $1,226 to service a nonperforming loan in 2020, compared to $1,960 in 2019, the cost could move higher later as it did during the Great Financial Crisis, possibly even topping $2,000.

“When forbearance may not be an option for many borrowers anymore, and they need to move into workouts, we could see that cost go up,” said Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association, at a recent virtual event.