Mortgage Defaults Could Pile Up at Pace That Dwarfs 2008

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The forbearance process is worth further describing. So, hypothetical situation: lets say I have a mortgage serviced by Quicken (don't get excited they are private) and I just heard the CARES Act allows me to skip payments. I'm a waiter, I just got laid off, I could really use 3 months without my $2k mortgage payments. I call them, wait on hold for two hours, and then they agree to let me not make payments for the next three months - and they will send the info to sign. Great, right? Almost too good to be true.

So, here are the three outcomes of a forberance after Quicken quickly agrees to it:

1.) BY DEFAULT - From the borrower's perspective, I don't hear anything for three months. Then, in month 4, Quicken calls and says I have 4 payments, three of which are "delinquent." I now learn there are 4 payments - all due in month 4. Well, hold on I just returned to work I don't have $8k - what can I do besides YOLO FDs? Well, probably not much.

2.) Payment Plan - the next option is to resolve that past due $6k on a payment plan, if the lender agrees to this. So instead of a $2k payment, I might have a $2500 payment for a year. Now I just returned to my service industry job - I was already paycheck to paycheck, I have all sorts of other past due credit card/auto/student loan bills from being laid off, and now my mortgage is 25% higher. That's not going to work for me.

3.) Loan Modification - A loan modification is the option that everyone thinks they are getting through CARES Act by default - it extends the term of the mortgage and adds the missed payments to the end. This is not a scenario that will be provided over the phone as an immediate solution if I call Quicken and ask. It has to be applied for, I would have to qualify, and it has to be approved by the lender. It is not a trivial request, and it will not be approved lightly given the current lending environment and amount of credit risk. Plus, considering the lender has already made 3+ payments to the GSEs without one from me - they are going to want to quickly determine whether this is going to be a performing loan or a non-performing loan (more to come on this). They will want to flush out the good loans from the bad as soon as they can get past the time periods required in the CARES Act.

So, a loan modification requires a level of qualification (credit check, paystubs, etc.). As a borrower, I am then going to have to show this lender the amount of debt I've racked up paying for everything with credit cards while laid off - and how fricked my credit has gotten not paying any bills while waiting for my $1200 Starbucks allowance from the Feds.

I am a Loan Officer, as mentioned in the previous post. Half my week has been talking to past clients about forbearanaces, and most of them just want a few months of skipped payments so they can relax about the economy and have that safety net. Sure, some have lost their jobs or are on the verge of losing their jobs - in which case it makes sense, your alternative is worse. One owns three rentals I've financed and 0/3 renters can pay their rent this month.

SO MANY PEOPLE are requesting the forbearance on an elective basis that our industry experts are begging real estate professionals to properly describe to them how this works, and what they will be faced with. Servicers are quick to approve the forbearance, and the borrowers are not understanding the possible outcomes.

I have a friend I consider to be a business-minded, prudent, and intelligent individual. He called servicers for two properties, US Bank and Wells Fargo - one offered a forbearance of 3 months and the other offered 6 months. He took them, they said they'd send something for him to sign but that it was in effect. Neither made any effort whatsoever to explain to him the resulting options at the end of the forbearance. He called me to ask if it would have any adverse impact, as they had not described the process well to him.

These are call centers taking the requests, obviously they are doing what they can to get to the next call.

My company has a $110B servicing portfolio, and we got 8000 requests for forbearances IN A WEEK. Mr. Cooper (subject of my last post) has a $640B servicing portfolio.

At the end of this initial 3-6 month forbearance that lenders are required to offer, we are going to see lenders quickly decide how to handle each file. As mentioned above, they consider the account delinquent during the forbearance (although not reported to credit) - so they already have a jump on the next steps to collect past-due payments. There will likely be a flood of "performing" loans (paid on time) turning into "non-performing loans" (past-due 180+ days). If a loan becomes non-performing, the GSEs end up auctioning off the assets (mortgage notes) in blocks. These blocks are generally bought at auction by funds and securitized into non-performing loan MBSs. Of the companies that do this, there are only a few that have publicly traded entities.

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So how do I profit off this? Buy foreclosed properties on the cheap? YOLO puts in lending companies?

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How would this affect the housing market? Ideally I would like to buy a house this summer

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Suntrust auto loans are simply tacking the unpaid P/I on to the end of the loan, seems mortgages would do the same thing. People's payments wouldn't have to go higher.

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