Government mortgage bailout numbers improve slowly, but the real test is ahead

The number of borrowers in government Covid-19-related mortgage bailout programs is shrinking, but those in private-label or bank bailouts is rising.

This suggests that there is still pain ahead in the mortgage market, as some borrowers are simply not recovering enough financially to afford their home loans.

The total number of mortgages in active forbearance programs, where borrowers delay their monthly payments for at least three months, declined by 26,000 last week or 0.7%, according to Black Knight, a mortgage technology and data firm. This marks four consecutive weeks of improvement, but the pace has been slowing for the past few weeks.

As of Sept. 15, just under 3.7 million homeowners remain in these plans, representing 7% of all active mortgages. Together, these loans represent $781 billion in unpaid principal. The number of forbearance plans are now down more than 22% from the peak of over 4.7 million in late May.

The government plan under the CARES Act, which includes borrowers with loans backed by Fannie Mae, Freddie Mac, FHA and VA (the vast majority of all loans), is designed as an initial three-month plan with potential three-month extensions up to a year. Three-quarters of borrowers still in forbearance are in extensions from their initial periods.

About 1.7 million of these borrowers are seeing their plans expire in September, so servicers are already assessing if they need extensions or if they can be removed. Overall, there has been a  60/40 ratio of forbearance-plan extensions versus removals.

"The high number of forbearance plans set to expire in September is more akin to what we saw in June, though — at the end of a 90-day cycle — when the ratio was 80/20. That would equate to roughly 320,000 removals," said economist Andy Walden, Black Knight's director of market research. "September also marks the end of the first six-month period called for in the CARES Act, which requires a borrower to proactively request an extension beyond that point, so we could see an even higher number of homeowners come out of forbearance."

The number of borrowers in government forbearances dropped by 31,000, but those held in private label securities or banks' portfolios rose this week by 5,000. Borrowers with Fannie and Freddie loans have seen the biggest improvement, while FHA/VA volumes in forbearance have fallen by far less.

 "The next few weeks will provide a lot more clarity as to what the market will look like heading into the end of the year," Walden said.