The market might need to rethink its benchmark for mortgage performance as pandemic stimulus gets rolled back this year, according to Fannie Mae Chief Economist Doug Duncan.
This observation, made in line with his
Most typically, measures like delinquencies have referenced comparisons to the long-term average or the historically-low
“That’s an interesting question given all the regulatory change that has taken place over on the servicing side of the business,” Duncan said in an interview with this publication, noting the timelines and criteria for mandated workouts have changed.
The potential revision to servicing policies in response to practices temporarily instituted during the pandemic could play a role in answering that question, he noted.
“Some of the experiments in [temporary, pandemic-related policies] have actually taught the industry some things about what's optimal, both for consumers and for the lenders and servicers,” Duncan said.
The notable borrower recovery rates following the broader-than-usual application of long-term
“Going forward, with the removal of the stimulus and the income-transfer payments within it, for people that have difficulty meeting their mortgage payments, it'll be more challenging,” Duncan said. “It'll go back to more longer term trends…related to normal levels of income growth.”
Absent permanent change to servicing rules, loan performance measures like delinquencies likely will return to levels near their historical norms but remain relatively strong due to the fact that loan quality has been particularly good, according to Ralph McLaughlin, an economist at Kukun, a provider of property data and predictive analytics.
“We should expect loan performance to revert back to the long-run average, principally because federal regulations artificially (but rightly so) reduced defaults and foreclosures through very generous forbearance programs,” McLaughlin said in an email. “Now that these protections have been lifted, loan defaults and foreclosure are likely to increase as borrowers who are still suffering economic hardships from the pandemic are more likely to be pushed through the foreclosure pipeline than at any point in the last two years.”
However, high home prices and levels of
He also noted that while stimulus is being phased out, the amounts some consumers have accumulated could fuel their spending.
“While the savings rate is now a little bit lower, maybe a half a point lower than it was at the start of the pandemic on balance sheets, households have $2.5 trillion more than would've been anticipated in the trend pre-COVID. So they actually have a lot of cash [but] more of it is in higher income households,” Duncan said.
Because of this, while experts consider a slight uptick in delinquencies likely at some point, they forecast its arrival will be uneven and gradual.
“Delinquency should nudge some as CARES Act and like relief measures run their course,” said Stephen Staid, executive vice president of mortgage practice strategy at industry outsourcer Sourcepoint, in an email. “Some industries such as tourism and hospitality will see longer-term issues as COVID restrictions continue beyond the relief period.”
He expects late payments to increase as those affected look for work in other industries in a transition that could take time and potentially result in lower incomes.
“This likely increase in delinquency will be a bit sticky as delinquent loans will take two-plus years…to work through the default process,” Staid said, noting that the loss mitigation measures currently available will help contain the number of people affected.
