I recently read a great article from Barry Habib that explains it quite well.
1- When interest rates drop dramatically, there is an increased incentive for many people to refi their loans. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year break-even period.
2- The level of forbearance request has increased over 2 million… the Servicer must make the payment to the investor, even if they have not yet received it from the borrower.
3- But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.
4- The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.
So, what’s the answer….depends on who you ask!
A few things are clear: The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.
Want to better understand the Mortgage Servicer’s role?
Here’s a quick video!
