Do you know whether your home mortgage is owned by a lender or an investor in the secondary market? Probably not. After all, under normal circumstances knowing this is not really necessary. But in a time like this when many people are looking to defer monthly mortgage payments due to financial hardship brought on by the coronavirus pandemic, this is very important to know because it could determine how long you can defer your payments.
CNBC recently reported that some homeowners who had mortgages with Bank of America were struggling to defer payments for more than a few months. One specific borrower mentioned in the article said the bank told her she could delay her $2,200 monthly mortgage payment for three months but then would have to pay the entire sum that was deferred, as well as the current mortgage payment on the fourth month.
That's not super helpful, considering the pandemic could last for much of the year. When most borrowers defer payments, they prefer to add those payments to the end of the loan so they have time to catch their breath, as opposed to having to pay them in four months.
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The reason Bank of America said it had to maintain this policy is because the borrower's mortgage is owned by outside investors in the secondary market. The current guidance for investors is to allow deferment for three months, at which point the payment might be pushed to the back end of the loan or have to be paid right away. For loans that it currently holds and have not been sold to the secondary market, Bank of America said it could be much more lenient by deferring payments on a monthly basis and adding those to the end of the loan.
What is the secondary market and how does it work?
Think of the secondary market as the middleman between lenders and investors. Lenders typically use their own funding to originate a mortgage, but if they had to fund every single mortgage they would run out of money. So they take loans and sell them on the secondary market to get access to more cash that they can lend. The secondary market consists of government-sponsored entities (GSEs) such as Fannie Mae and Freddie Mac, who take the loans they just bought from lenders and package them into investment vehicles called mortgage-backed securities. They then sell those securities to investors, such as pension funds, insurance companies, and hedge funds. Lenders can also buy those securities.
If your lender took your loan and sold it into this market, they may not have the power to let you move those deferred mortgage payments to the end of the loan, as was the case with the Bank of America borrower discussed above. But in some cases, the banks will hold onto and aggregate loans for a certain amount of time. While doing this, they still own the loan and effectively have more power over how they deal with deferments.
Bank lenders vs. non-bank lenders
This issue is even more complex if you got your mortgage from a non-bank lender. Companies that fall into this category include Quicken Loans, Loan Depot, Veterans United, and Fairway Independent Mortgage, among others.
These lenders are at a disadvantage because unlike Bank of America, they don't have access to liquidity and assistance from the Federal Reserve. Now, if a borrower doesn't pay them, they have nowhere to turn for the short-term funding they need to keep making payments to the investors that now own the loans they have been servicing.
As a result, these lenders will likely be much less lenient with borrowers because if they are unable to facilitate the payments, that would force the GSEs to find other solutions for servicing the mortgages. In other words, they could go out of business. To solve this liquidity crunch, U.S. Treasury Secretary Steven Mnuchin has created a new task force to try and find solutions as soon as possible.
Solutions could be coming
Recently, Fannie Mae and Freddie Mac, which originated 46% of all mortgages in 2018, said they will roll out a payment deferral plan, which will allow borrowers to defer their delinquent principal and interest payments. Those payments, according to the GSEs, will come due either on the mortgage maturity date, the pay-off date, or upon the sale of the property, whichever comes first. The term of the loan and payment schedule will stay the same.
This policy effectively defers payments until the end of the loan. However, lenders will not be able to start evaluating borrowers for this program until July 1. The Housing Policy Council, a trade organization consisting of mortgage lenders from JPMorgan Chase and Quicken Loans, is also currently working on a solution that would allow for a temporary pause in payments on home loans.
Call your lender
All of this means that if you are planning to defer your mortgage payment, you need to figure out the status of your loan and whether it is owned by the lender or has been sold into the secondary market. One potential way to do this is to use the Fannie Mae or Freddie Mac lookup tools to see if one of the GSEs owns it, although the surest way to find out is by calling your lender right away. The status of the loan will have a huge impact on the overall deferment plan, including how many payments can be deferred and when they will come due. Also, keep following the news and updates from the perspective agencies because things are changing on a daily basis.
