Forbearance rates have declined for the 11th week in a row, according to the Mortgage Bankers Association’s (MBA) latest Forbearance and Call Volume Survey. The total number of loans now in forbearance decreased to 5.47%, down from 5.67%. MBA estimates 2.7 million homeowners are still in forbearance plans.

While a declining forbearance rate is good news for the US economy, that doesn’t mean these remaining borrowers are all in the clear. Marina Walsh, vice president of industry analysis research and economics at the MBA, explained why that last 5% may prove slower to emerge from forbearance. She highlighted, too, why IMBs seem to be carrying a higher forbearance rate than the big banks.

“If you take all the forbearance exits from June 01 to November 08, about one third were leaving forbearance without any arrears,” Walsh said. “There was no need for a loss mitigation strategy, they were leaving for good reasons. Reinstatements, too, are as high as 17% which means that even if they were one or two months behind, they were able to come up with that full payment.

“The one option that’s the most tenuous is this 13% of exits who are not current, who are not making payments, and have no loss mitigation option in place yet…In general, those leaving forbearance up to this point have been for pretty positive outcomes but what’s left here could be those borrowers that are truly distressed.”

Walsh pointed to a declining monthly percentage of forbearance exits from that category of borrowers who kept up their payments and didn’t accrue any arrears. In June, according to the MBA, they comprised 49.99% of exits. In October, they were down to 19.64% of exits. Conversely, that most distressed category has grown from 7.62% of exits to 22.20%.

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That shift could point to a story where most of the best-off borrowers have already left forbearance and the borrowers who are left are stuck in a much worse financial position.

She said a breakdown of delinquencies, as well as wider economic data, points to a tougher picture for FHA borrowers. Many of these borrowers work in lower-income service jobs that have been among the worst-hit sectors during the pandemic.

Walsh believes the disproportionate struggles of FHA borrowers explains why IMBs are carrying a bigger percentage of loans in forbearance than big banks, 5.94% to 5.43%. IMBs, Walsh said, have a larger Ginnie Mae portfolio which includes FHA, RHS, and VA loans, as opposed to conventional loans. She says a higher forbearance rate by IMB servicers doesn’t mean they’re doing a “worse job,” rather it reflects a different portfolio makeup.

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Despite a somewhat pessimistic outlook on the state of the remaining borrowers in forbearance, Walsh says there isn’t reason for the wider housing industry to panic. She stressed that 2020 is not 2008 and the underlying strength of the housing market means even distressed borrowers could be saved by the growing equity in their homes and huge demand from homebuyers.

“Distressed borrowers are going to be helped out by potential equity accumulation,” Walsh said. “There could be equity in their homes, combined with house price appreciation because we’re in this pretty significant housing inventory crisis. There’s plenty of mortgage demand because interest rates are still really low. If you look at our MBA forecast on where things are heading, we expect purchase originations to still go up over the next three years.

“Is every situation perfect? No. But distressed borrowers are potentially in a better situation in 2020, than they were in 2010.”