Fannie and Freddie did not do this, and as a result, loans tightened considerably.
“We are focused on keeping the mortgage market for current and future homeowners in these difficult times,” said FHFA director Mark Calabria in a statement. “Purchases of these previously ineligible loans will help provide liquidity to the mortgage markets and allow originators to continue lending. “
Mortgage lenders, both bank and non-bank, sell most of their loans to Fannie Mae or Freddie Mac, known as government-sponsored companies, or GSEs. Or, if supported by the FHA, they are sold to Ginnie Mae. It can take a few weeks after a loan ends for it to be sold. When the government’s mortgage bailout, which started just over a month ago, some loans that had just ended but had not yet been purchased were put on hold.
The forbearance program allows borrowers with economic difficulties due to Covid-19 to delay monthly payments for up to a year. These payments must be made at a later date. CARES law, which was enacted late last month, does not require borrowers to provide documents or evidence of hardship.
More than three million loans are already in the forbearance program. Because Fannie and Freddie would not buy the loans that had just closed, credit has tightened considerably, making it more difficult to get a new loan for all borrowers. Lenders feared that the loans they made would be put on hold before being sold, leaving them on the hook, unable to sell them.
The announcement is expected to make the market somewhat more flexible, although there are certain eligibility criteria and limits, according to the FHFA:
- The mortgage must have been closed on or after February 1, 2020 and before May 31, 2020.
- Loan must be a mortgage purchase transaction or refinancing without withdrawal
- The loan cannot be past due for more than 30 days.
In addition, eligible loans will be subject to an additional price adjustment at the loan level – 5% for first-time buyers and 7% for first-time buyers.
There is, however, disagreement on what these higher costs could do for mortgage rates. Some say it could cause mortgage rates to drop slightly as the credit box opens further. Others say that some lenders will pass these costs on to borrowers in the form of higher rates.
“We welcome the policy change that forces GSEs to buy most of the forbearance loans,” said Bob Broeksmit, CEO of the Mortgage Bankers Association. “We look forward to working with FHFA and GSE to arrive at more appropriate prices and broad coverage for all types of transactions. “