Bank earnings could be very complicated, as many could face more delinquencies than forecasted

 

U.S. banks will significantly struggle to understand and interpret how their residential mortgage portfolios will perform this year, because borrower-assistance programs “bailouts” during the pandemic have clouded who will be able to pay when the very gracious forbearance periods and enhanced jobless benefits expire. I believe that lenders should be bracing for significant losses across most credit products, but mortgages stand out because the share of those loans in forbearance has continues to rise.

The key difference: the mortgage forbearance program is imposed by U.S. agencies that back the vast majority of housing debt and it does not require borrowers to show proof of hardship. That has made it difficult to tell who enrolled out of real need; including those who will never be able to resume payments and the con-men who took advantage of the Covid-19 forbearance opportunity! [I have 4 tenets who work for the Department of the Navy, who never got laid off, but have not paid their rent in over 8-months, they were never furloughed or laid off? They are leeches!]

So no one really knows how many of these folks who are in forbearance are actually going to be able to recover, and how many of them are also going to go into a serious delinquency cycle.

Some of the biggest U.S. mortgage lenders like JPMorgan and Wells Fargo may talk about mortgage trends when they start reporting 1^st quarter results on Friday.

 

About 2.7 to 2.9 million U.S. mortgage borrowers, were in forbearance programs as of 01/06/2021 according to the Mortgage Bankers Association (MBA). The numbers began rising toward year-end but remained far below the 8.6% peak in June, MBA report indicated.

The homeowners who remain in forbearance are more likely to be in significant distress, with fewer continuing to make any payments and fewer exiting forbearance. More than 58% the borrowers in forbearance have been forced to request extensions since October. Those who have remained in forbearance since the start of the bailout programs are the least likely to re-emerge, credit-monitoring service TransUnion recently stated. When all of these bailout plans stop, they will likely NOT have the ability to repay!

Banks and bank-investors should be worried about a repayment Wile Coyote cliff when relief programs expire.

Most of the increase in forbearance requests have come from customers with Ginnie Mae-backed mortgages, the MBA report indicated which caters more to 1^st time homeowners, and those with low-to-moderate income, than its peers Fannie Mae and Freddie Mac.

Please remember that these (3) government-sponsored firms have offered 12-month payment holidays through March 2021. Banks including Chase, Wells Fargo and Bank of America Corp offered similar relief and are allowing borrowers to tack missed payments onto the end of their debt, rather than face balloon payments when forbearance ends.