Tough choices for many low-equity borrowers: refi, fire-sale, forbearance or foreclosure.

Massive job losses have directly, or by domino effect, impacted millions of mortgage holders to the point that they cannot pay or soon won’t be able to make their payments.

The Cares Act gave a lot of thought to protecting mortgage holders from losing their homes, but, so far, has given no thought to assisting mortgage servicers who have obligated funds that must be passed on to mortgage investors.

As part of the Cares Act, borrowers with federally insured mortgages have the right to postpone monthly mortgage payments for up to one year, so long as a COVID-19 financial hardship is being experienced. In technical terms, this is called forbearance.

Most mortgage holders making forbearance claims are in financial distress as the coronavirus consequences continue. Some 22 million people nationwide have filed for jobless claims as businesses shutter temporarily under shelter-in-place orders. At least 2.81 million people have filed for unemployment funds in California. 

I estimate that “strategic forbearance borrowers” or SFBs are not yet in financial distress but will consider using the Cares Act to delay payments. Consider this another moment of “don’t ask, don’t tell.”

Yes, these so-called SFBs are skirting the purposely wide-open loophole in the law that firmly states proof of hardship is not required. But who can blame them for shifting into survival mode as they are rightfully worried about holding onto the place where they and their loved ones are able to shelter in place? This is home.

Self-preservation instincts are kicking in, focusing on preserving precious cash reserves. That seems to be a fair and reasoned tradeoff for adding those missed mortgages payments onto the backend of the payoff balance. Until we get past this pandemic, buying some time is key.

While we might say it’s fair for folks to hunker down and save, it puts mortgage servicing lenders in a tough spot. Servicers are required to advance the government (FHA and VA) and conventional (Fannie Mae and Freddie Mac) repayment obligations to upstream investors.

On Thursday, April 16, U.S. Housing and Urban Development Secretary Ben Carson said money should be set aside to help mortgage-servicing companies that are at risk of failing as millions of borrowers miss loan payments.

“Obviously, we want there to be money to help the servicers of these mortgages because some of them don’t have deep pockets,” Carson said in a Thursday interview with Fox News. “The housing-finance structure needs to be maintained. It’s not just the people who took out the mortgage.”

Bloomberg reported that Carson made his remarks in response to a question about what he’d like lawmakers to provide for mortgage relief in future coronavirus-stimulus legislation. He didn’t comment on whether he believes agencies such as the Federal Reserve or Treasury Department should act now to provide a liquidity facility for mortgage servicers.

Nearly 4% of mortgages are now in forbearance whereas just 0.25% were in forbearance a month earlier, according to this week’s Mortgage Bankers Association survey. That number is expected to rise rapidly.

The good news: Last week Ginnie Mae expanded its issuer assistance programs effectively allowing FHA and VA mortgage servicers to apply for financial assistance to keep those Ginnie Mae repayment obligations coming.

The bad news: The Federal Housing Finance Agency or FHFA (regulator and conservator for Fan/Fred) forged a forbearance plan but is not yet endorsing any type of U.S. Treasury liquidity facility (or line-of-credit) so that mortgage servicers can borrow funds to help make their investor repayment obligations.  

Last week even the normally buttoned-down Mortgage Bankers Association blasted FHFA Director Mark Calabria about his lack of support for a liquidity facility in a statement by MBA President and CEO Robert Broeksmit.

By squeezing mortgage servicers to advance their remaining funds instead of providing a lifeline of credit through Uncle Sam, Calabria will have to put on hold any dream of Fan and Fred released from conservatorship. Instead, Fan and Fred will have to deal with a boatload of defaulted loans that will hurt their balance sheets and their profit margins.

Calabria was quoted in a recent Financial Times article in which he said F & F could last 12 weeks of a lockdown before needing a bailout. Coronavirus fallout has so far ruined Calabria’s dream.

I believe political pressure from many corners and common sense will prevail. Calabria will come around on the liquidity facility. Mortgage servicers will get their conventional lifeline but certainly not before some servicers needlessly crashed as Calabria got too comfortable in the ivory tower.

Let’s not kid ourselves. Mortgage lenders have other big survival challenges as well, one of which is early payment defaults. Plenty of borrowers are refinancing into lower mortgage rates or pulling cash out. Mortgage lenders are wondering aloud just how many will then demand mortgage payment forbearance?

Will Fan/Fred claim missed payments (forbearances allowed under the Cares Act) in the first months of a new loan as early payment defaults, requiring cash-stung lenders and servicers to buy those mortgages back? The answer remains elusive.

For now, lenders are narrowing their mortgage menus and making stringent underwriting changes. We already know that non-traditional mortgages or so-called non-QM mortgages (bank statements, fog-the-mirror and the like) are toast. Jumbo loans are available but constrained.

Shortly after Wells Fargo Bank announced tighter requirements, so did Chase Bank. Mortgage insurance giant MGIC temporarily suspended the insuring of investment properties and cash-out refinances.

Locally, a lender raised its minimum middle FICO score bar for conventional mortgages to 680 whereas Fannie guidelines go down to 620. An FHA lender that previously allowed middle FICO scores down to 500 is now largely requiring a minimum of 620.

Due to market volatility, many lenders are requiring rate locks to be granted after the mortgage borrower is cleared to close. Many lenders are making it difficult to get any type of competitive price on a no-cost loan because they are afraid rates will drop further and they will lose the borrower after fronting all of the closing funds.

Especially vulnerable are those untenable borrowers with questions of income cuts, little cash reserves and little equity. As of February 2020, there were 52.9 million mortgages in the U.S. Of those, 6.6% or just under 3.5 million of those homeowners have less than 10% equity, according to Black Knight.