Credit risk

Forbearance rate increases with loan credit risk

Proof of mortgage loans contracted between 2018 and 2020

Since March 2020, the COVID Relief Program under the CARES Act has allowed millions of homeowners to temporarily suspend or reduce their mortgage payments.[1] However, for many of these owners, the forbearance plans have already expired or are expiring soon. The maximum abstention period was 18 months for most programs. Thus, a loan that entered the forbearance period in April 2020 should have exited the forbearance period no later than October 2021. According to the Mortgage Bankers Association (MBA), the share of mortgages in the forbearance period has decreased to 1.41% in December 2021, a decrease of 26 basis points compared to 1.67% the previous month.

Data from CoreLogic shows that forbearance rates were higher for higher priced loans.[2] In this blog, we look at the forbearance rate by APR (annual percentage rate) and the spread of the average prime rate (APOR) for all conventional loans. APOR is a weekly market index of the average APR of loans offered by selected lenders on several mortgage products offered to highly qualified borrowers.[3] The difference between the APR of a loan and the APOR is called the “credit spread”. In general, loans with a rate spread of 1.5 percentage points or more are considered higher priced loans.

As abstention and delinquency are strongly correlated, the result is consistent with our previous analysis. Our previous analysis showed that delinquent loans increased as the credit spread increased. Figure 1 shows forbearance rates for conventional loans for the years 2018-2020.[4] Forbearance rates in the figure are displayed by spread category, in 0.25 percentage point increments. The figure shows that the forbearance rate was lowest for loans with a spread of 0% to 0.25% and highest for loans with spreads greater than 2%, based on service data through November 2021. There have been notable increases in forbearance as rates deviate. increase. In particular, the variation in forbearance rates is shown between loans with spread categories of 1.25% – 1.49% and 1.50% – 1.74%. The forbearance rate for loans with a spread of 1.50% to 1.74% is 2-3 percentage points higher than for loans with a spread of 1.25% to 1.49 %.

Figure 1: Forbearance rate by deviation above APOR and vintage: active conventional loans as of November 31, 2021

Cumulative abstention rates of 9%, 8% and 2% for the 2018, 2019 and 2020 vintages, respectively[5]

Source: Merged CoreLogic LLMA and HMDA 2018-2020 data

© 2022 CoreLogic, Inc., All Rights Reserved.

Higher-priced loans were more likely to forbear than low-spread loans in this analysis. However, not all forbearance loans are in some form of delinquency. About 54% of homeowners with conventional loans in active forbearance plans in November 2021 were current on their mortgage payments. Some owners may have applied for forbearance in case their financial difficulties worsened even though they were able to keep up with their payments.

An increase in foreclosures at the end of the forbearance plan is unlikely. As reported by CoreLogic, the foreclosure inventory rate was at its lowest level in 22½ years of 0.2% in October 2021, compared to 0.3% in October 2020.[6] The very rapid appreciation in house prices in 2020-2021 has boosted home equity. Record levels of home equity will help limit the number of homeowners who experience foreclosure.

© 2022 CoreLogic, Inc., All Rights Reserved.

[1] The CARES (Coronavirus Aid, Relief, and Economic Security) Act was signed into law on March 27, 2020 and its forbearance provisions cover federally supported mortgage programs (Fannie Mae, Freddie Mac, FHA, VA, RHS) . A borrower with a federally guaranteed mortgage who is experiencing financial hardship due to the COVID-19 emergency may apply for forbearance; forbearance is granted for up to 180 days and is extended for an additional period of up to 180 days at the request of the borrower. The owner’s credit rating will not be affected during the forbearance period despite missed/late payments. Federal regulators have extended the forbearance period to a maximum of 18 months.

[2] CoreLogic Loan-Level Market Analytics (LLMA) data was merged with HMDA 2018-2020 data using a unique matching technique that linked LLMA loan performance data to HMDA source data. The match was based on loan characteristics, such as loan amount, loan purpose, loan type, census tract, year of origin, and lender identity key. The overall match rate was about 50% of the LLMA data. Loan forbearance status was tracked through November 2021. We include both purchase and refinance loans in our analysis to provide a comprehensive review. The rate differential below 1.5% was not provided in the HMDA data before 2018. Thus, we only include loans issued in 2018-2020.

[3] See the CFPB website What is a “higher mortgage” | Consumer Financial Protection Bureau (consumerfinance.gov)

[4] The forbearance rate is the percentage of loans active in November 2021 that had been forborne at some point (even if they were outstanding in November 2021), out of the total number of loans issued for that year, including those that had been reimbursed.

[5] The cumulative forbearance rate is the forbearance rate for all conventional loans per vintage. Forbearance rates were much lower for the 2020 vintage, as loan applicants who were approved for a mortgage after March 2020 had not lost their jobs or businesses due to the pandemic. They still had stable employment and sufficient income to qualify.

[6] The foreclosure inventory rate is the share of mortgages at a certain stage of the foreclosure process.