Forbearance – BEHIND the glass – A look at investors and servicers and what is happening
This is part one of two of my interview with Patrick Queally on Forbearance. This section is mainly behind the scenes look at the investor and servicer of a loan and what their responsibilities are.
Maryann: Hey guys! I’m here with Patrick Queally and I’m very excited today I have seen Patrick speak multiple times either through a lot of Nick’s organizations and most recently at our brokerage. He has some excellent information. I was particularly impressed with the information he had for VA programs. My husband is a police officer and also a vet
Patrick: I didn’t know your husband was a vet.
Patrick: Okay. Well, thank you for your sacrifice and thank him for his service.
Maryann: Thank you so much. I appreciate it. Yeah, he’s a vet. He’s still you know on the front lines as a cop. We feel very grateful for all he does and of course we want to always take advantage of the vet programs when we can because they do have some really good mortgage programs. So, I want to jump right in a little bit with Patrick’s background and his career in the mortgage industry. He started as a loan processor in ‘93, I believe it was, correct?
Patrick: Yep. ’93.
Maryann: He was promoted to an underwriter and later named vice president of residential and commercial mortgage lending which is pretty amazing at a local community bank he maintained a big pipeline of residential and commercial transactions, really from the beginning to the end.
Patrick: At a small community bank you never really let go of any duties they just keep adding more and more on.
Maryann: And of course as the years progressed and this Patrick got more experience he worked in a variety of lending institutions as well you work for national lenders, correct? And also regional and community banks.
Maryann: So, he’s definitely, he knows his stuff and then in 2017, was it?
Patrick: Yep. 2017.
Maryann: 2017 producing branch manager for a growing national correspondent and it’s Hancock mortgage partners, correct?
Patrick: That’s correct, yes.
Maryann: Awesome. He serves on the companies even on the advisory board for them as well, correct?
Maryann: All right. Patrick has a ton of information and if you ever listen to him speak as I have, you’re going to get a lot out of today and obviously I think that Patrick should be sharing everything he has with the world. He even has a podcast tell us about your podcast.
Patrick: Yeah. In addition to being you know producing branch manager here for Hancock, I do have a podcast series.
Maryann: Wait, don’t tell them the name yet.
Patrick: Okay. All right.
Maryann: Because if you’re from New England the name is perfect.
Patrick: Yeah and that’s really why I chose it. So, part of parts or maybe this whole interview is going to be repurposed for that as well, of course with your permission. The interviews that I do are with local small business owners in the community real estate agents, financial planners, insurance agents. It’s sort of real estate centric but I’m branching out beyond that and it’s really you know, more of a shop local movement, support the local businesses in your community. And that was all before this whole you know, covid19 about and you know there’s more of an I support your local businesses theme going on right now. The podcast that I have been doing I’ve actually been inviting people into my office and we’ve been doing it, broadcasting it live, shifting gears obviously with everything that’s going on and more the interviews are taking place like this is with you know video conference.
Maryann: Right. Which is kind of the nature of what we’re all dealing with right now? So, tell us the name of your podcast because when I saw this, I was like well this is perfect for Boston, perfect for New England.
Patrick: Yeah. It is the wicked awesome report.
Maryann: I love it.
Patrick: In California who has a long-standing video blog. I spent some time out there with him and of course, he’s you know making fun of the box and accent and everything’s wicked awesome and he introduced me to one of his friends as hey this is wicked awesome loan officer from Boston and then from then it just stuck. So that’s the sort of the theme or the motto you know a tagline that I’m going with the wicked awesome loan officer.
Maryann: Does he think you have the big Boston accent that you drop your arse
Patrick: According to him I do but again he’s based in California, so we’ll say no.
Maryann: I think the further out we get from Boston we get our arse back in but if you’re from even New England if you go somewhere outside of this area everybody thinks you’re from Boston.
Maryann: I invited Patrick on today, I really wanted to get his thoughts and his perceptions of what’s happening right now with the economy and our country and mortgages. I’d love Pat to give a quick overview of what you know, what we’ve already seen, what’s already happened, and what’s going on. And what his predictions are and what they’re likely going to be for the future. I think that’s going to help us put into context. How and why some of the questions I have for him today are pertinent. You know, I do want to talk about forbearances and I do want to talk about modifications, what homeowners should do right now. So, if you have anything to add, throw it in Patrick.
Patrick: Okay, great. I think the best thing to do is just to try to put it into a bigger picture context. Take a look at what’s going on from an industry level. What’s happening in real estate in mortgages as a whole and then take a look at describing a little bit what’s happening to the individual consumer, okay. That will help put it hopefully put into a context. May actually answer some of the questions but I’m sure it’s going to lead to a whole bunch of additional questions. So, from an industry perspective, sort of set the stage here as to how a mortgage transaction happens. Maryann, I’m going to use you as an example. You’re the borrower, okay. You’re taking out a mortgage, you’re buying a house and you’re borrowing $300,000. When you get to the closing table the mortgage lender that you’re working with and again this is not across the board with every single transaction but this is a typical example of how it works, okay. So, you get to the closing table. The lender that you’re working with has to send $300,000 to that closing attorney to fund your transaction. Well, that mortgage lender has to borrow that money in most cases. So, they have were called warehouse lines of credit, okay. You think of it like in consumers you know, credit card or a home equity line of credit except it’s a much larger dollar amount. The mortgage lender borrows that $300,000, wires that $300,000 to the closing attorney to conduct your closing and fund that transaction. The attorney disperses all the funds to the seller or everyplace else that needs to go, the mortgage lender gets your close loan filed back, make sure all the paperwork is signed correctly and then typically what happens is that loan is going to be sold on the secondary market. It’s going to be transferred to a loan servicer. When it goes to that loan servicer, the loan servicer is going to review the package, make sure everything is you know, sound underwriting principles, we used to calculate income and credit, okay. And that mortgage loan servicer is now going to pay for those servicing rights. They’re going to pay the mortgage lender that you took the loan out with the $300,000 you know, the principal loan amount plus let’s say 2, 3 4 you know, 6 points you know, that 6% of the loan amount. That’s the mortgage lender’s income when they sell that loan in the secondary market. That’s what happens.
Maryann: Let me put this together for someone who has doesn’t understand this and it doesn’t work the way we do and please corrects me if I’m wrong Patrick. What happens if I go get a loan and let’s say, I go get a loan from ABC loan company. I go to closing I have my $300,000 they are selling that loan or they’re selling the servicing rights to that loan. That ABC loan company now may become like a Wells Fargo or a Bank of America or some other servicer of the loan, correct?
Patrick: Yes. Exactly. You as a consumer now your payments every month are going to that loan servicer, not necessarily the same company that originated your loan and brought it to the closing table, okay. Now here’s where it starts to get a little bit tricky. Once that mortgage lender that brought you to the closing table, once they sell it on the secondary market they get that $300,000 plus a profit they take that $300,000, and now they pay back their warehouse line of credit, the money that they borrowed to fund your transaction. That’s an important piece in a couple of minutes. Just remember that the money that they fund your transaction they also borrowed. Now every single mortgage lender has contracts with the companies that they sell to the mortgage servicers they sell to. And those contracts have a whole bunch of stipulations. Two real important ones are called an EPO and an EPD, okay. An EPO is an early payoff. A mortgage lender is basically guaranteeing to the loan servicer that you, Maryann as the borrower, you’re going to make at least 6 payments. Because that mortgage servicer, they’re laying out you know, a decent sum of money to buy those servicing rights really a break-even point for a loan servicer is three or four years out. By the time they recoup the money they laid out to capture those servicing rights. So that loan servicer doesn’t want you paying off that note within the first couple of months. So, a mortgage lender that brought you to the closing table pretty much has to guarantee to that loan servicer that Maryann, as the borrower that she’s going to make at least 6 monthly payments before refinancing or doing something else to pay off that loan. So that’s an early payoff. When that does not happen, when a consumer rebuys or sells the home or somehow otherwise has pays off that loan within the first 6 months or before 6 months where the payments were made that mortgage loan servicer comes back to the company that originated the loan and sold them and say, hey you didn’t live up to your end of the agreement. Maryann didn’t make 6 months payments, enough to pay us back the five four five six points and whatever we paid you when we bought that loan. In the business, it gets a little bit deeper you know serial refinances like that, it’s called loan churning, and different loan products actually specifically prohibit that but that’s another conversation. So that’s an EPO early payoff. Now what’s really at the heart of the matter of the current state of affairs is something called an EPD, early payment default. That’s when you Maryann, you fail to make payments within that first 6-month period. If that happens the mortgage servicing company that bought those servicing rights, can come back to the company that originated the loan and say, hey Maryann didn’t make her payments, here’s a buyback request. A buyback is when the consumer violates that EPD early payment default. They haven’t made their payments any time over that first 6 months and that loan servicer can require the company that originated a loan to buy that loan back. They have to give that loan servicer back the $300,000 and any commission they earned with whatever the three four five six points. Now a mortgage lender is in a really difficult position. That mortgage lender in most cases doesn’t service loans. They can’t have that loan in their books and collect payments. They have to sell it to somebody else. But that loan, that $300,000 loan is not worth $300,000 plus you know, four or five points. It’s actually been worthless. It’s going to be less than $300,000 because you have a loan where the payments haven’t been made. In order to get that off the books, most mortgage lenders are going to have to sell that at a discount. They have a $300,000 loan. They might only be able to sell it for $290,000 or $260,000. When there’s an early payment default, the mortgage lender is going to be in a bad position. I’m not crying for you know, for the mortgage lenders. I just want to put it into a context.
Maryann: Is there a difference for them if, let’s say you get through one, two, three years of payments. You’re me, I’m paying my loan. I get through two, three years of payments and all of a sudden, I lose my job and then I can’t make the payment. Is there a difference between when you are further into the loan?
Patrick: Yeah. Usually, the EPD is just for the first six months, early payment default. It applies really and in contracts can be different sometimes it’s twelve months, sometimes it’s only three months. It’s different. So, I’m sort of painting with broad strokes here, typical to the industry is 6 months. So, if you’re two or three years in, at that point that’s the loan servicers problem. The company that originated a loan really has nothing to do with it at that point. That’s sort of the clinical definitions if you will of an EPO and an EPD. In the current state of affairs, if a consumer so Maryann, we’ve helped you close on your home. The loan is closed as servicing has been sold, you’re a month into the transaction with the mortgage servicer and covid19 happens. You lose your job. You apply for forbearance. We’ll get it into the Cares Act and how that all comes about. But under the current plans, you apply for forbearance. Well, guess what, many loan servicers are categorizing a forbearance as an early payment default. And they’re going to force that company that originated that loan to buy that back.
Maryann: Even if they’re further into the loan or does it only have to be in those six months
Patrick: Within the first six months. It depends on what the contract is and again the contract is typically six months. It’s within that that contractual period they’re going to force that mortgage lender to buyback. That mortgage lender that brought you to the closing table now has to buy back that $300,000 loan and find somebody else that’ll buy it typically at a discount. They’re not going to get the full $300,000 plus a profit. But what makes it even worse for that mortgage lender, remember when I said the mortgage lender has to borrow that $300,00 to fund your loan? Well, they have contracts with their warehouse lines of credit. When they have a buyback that is a significant financial event. They have to, the contract is going to state, they have to tell their warehouse lender that they had a buyback.
Maryann: Does that jeopardize their position with the warehouse lender?
Patrick: Yes. The warehouse lender could terminate their line of credit. Which means that now they funded Maryann’s deal but they can’t fund Patrick’s deal or Mary or Jack or Joe’s deal because now they no longer have that credit facility to borrow that $300,000 to fund the next couple of transactions. It’s a whole sort of you know the trickle-down effect. Basically, you know, it hasn’t really come out to play just yet. It’s going to take a couple of months to unfold but as this happens, unfortunately, I mean just that sequence alone is going to be enough to bankrupt a number of mortgage lenders.
Maryann: This is interesting to me in the sense that you know, obviously the government went into high alert and threw out all these programs that would try to stimulate the economy, you get your stimulus checks, they’re doing bailouts for airlines, bailouts for cruise lines. Do you think we’re going to see bailouts for banks again? I mean is that what you’re saying is there a potential for this?
Maryann: Yes and no. I’ve got sort of a sequence as to how I want to explain this to try and tie it all together. So, yes and no. Selectively there is. Okay. And I’ll explain to you how that’s working and I’ve got a whole bunch of notes here. I just want to make sure like sequentially explained this. So that it makes sense, okay. The mortgage loan servicer, once that loan is sold and we’re beyond that buyback period, beyond that six months, they cannot force that originating company to buy that back. Let’s say you’re two or three years into it. Now you apply for forbearance. The mortgage loan servicer may grant that forbearance to you but the mortgage loan servicer doesn’t own the debt. They are simply a middleman. So, think of servicer as a building superintendent, okay. They don’t own the building but they’re knocking on the doors on the first of every month to collect the rent check, they’re fixing the blocked plumbing, the cracks in the wall, you know electrical fixtures are not working. They’re maintaining the building but they don’t own it. They’re collecting the rent payments and passing it on to the building owner. That’s a very similar analogy to what a loan servicer is. A loan servicer is going to send you your monthly bill, they’re going to collect that payment, they’re going to manage your escrow accounts and every month they’re required to send a check to the investor. The investor could be Fannie or Freddie, it could be Black Knight, it could be a pension fund. Basically, anybody who owns a mortgage-backed securities mortgage bond. Now here’s the kicker, that loan servicer has to make the payment to the note owner regardless if the homeowner sends their check or not. Now in a normal market, we might be approaching a 1% default rate. There may be 1 % of all borrowers in that servicers portfolio that doesn’t make a payment.
Maryann: In a normal market.
Patrick: In a normal market. So, in a normal market, the loan servicer is going to be liquid enough to still be able to send that full principal and interest payment to the investor even if they don’t collect it from the consumer at a 1 % default rate. The problem is we’re well beyond a 1% default rate. So again just another sort of crack in the system here, how would these loan servicers going to continue to send checks to the note owners if right now we’re at about a five and I have some stats over with you but the quick summary is we’re at about a 5 ½% of all mortgages in the US. And 5 ½% of those are currently in forbearance. The loan servicers not collecting the payments from over 5% of their borrowers in their portfolio
Maryann: And that’s right now.
Patrick: That is today. Well as of the end of last week. So, the status is current today. Within a couple of days, that’s what the stats are. So even if that loan servicer, that building superintendent if you will, is not collecting those payments they still going to pay that out. I’ll give you the quick hit on what the stats are
Maryann: Let me ask you, I don’t know if you the answer to this, Patrick. Because I want to draw a little bit of a correlation but back in the 2008 crisis, what percentage weren’t paying?
Patrick: Well, I’d have to go back and take a look at the stats but there’s a really interesting twist on that. Back in 2007 through 2010, there were all of these sorts of I guess we’ll categorize them as rescue programs, the loan modifications and things like that. But in order to qualify you have to demonstrate that you had some sort of financial hardship, you lost your job, there was some other sort of economic event that was out of your control. In the business, we used to call it a hardship letter. The consumer had to write and explain why they’re facing hardship. In the current state of affairs, there is no qualification. All you have to do is raise your hand and say I’d like a forbearance. There were no financial requirements. I have the stats here. So as of April 16th, 2.9 million dollars is that right 2.9, no 2.9 million consumers were in forbearance. 2.9 million loans. Which is about 5 ½% of all mortgages being serviced? The loan servicer is responsible, which equates to $2.3 billion a month that a loan servicer has to pay to the note owner. That’s a huge amount.
Maryann: And what happens if the servicers can’t make these payments?
Patrick: I don’t want to get political about it but it’s a political conversation. It really is, okay. I’m not taking sides with or against the administration or any administration but it’s a political conversation. So, an individual who has a presidential appointment by the name of Mark Calabria. Mr. Calabria is the head of the FHFA Federal Housing Finance which is basically the Supervisory agency that holds Fannie Mae and Freddie Mac and conservatorship. Based on 2007 through 2010 and all that happened, Fannie and Freddie were placed in conservatorship. And that’s a whole other long conversation.
Maryann: I thought I read last year that at some point they were attempting to come out of conservatorship
Patrick: Oh, but the Feds won’t allow that to happen. Fannie and Freddie have paid back multiples of what the bailout was. What the Feds are doing is keeping them in conservatorship and basically sweeping the profits out of their accounts at the end of every month. So again, a whole other political conversation. For right now for our conversations today Mark Calabria head of the FHFA has basically said that there is no such thing as too big to fail. If these loan servicers cannot make those obligations, well they’ll collapse, will step in meaning the FHFA will step in and will reassign that servicing portfolio to whoever’s left standing. In my opinion, communism much. They’re basically going to come in and take away somebody’s business and hand it to somebody else. Now those are for the Fannie Freddie back loans a slightly different twist on what the Treasury has done for the government loan. For an FHA, VA, USDA loan there has been a credit facility that has been created whereby those loan servicers, because this is really a temporary crunch, okay. You know, six months give or take maybe. You know, I mean it all depends on where with covid19 ends up but you know for the purpose of our conversation let’s say it’s a six-month cash crunch. So the feds have made a credit facility available for the government loans, so those loan servicers that are servicing government loans like FHA, VA, USDA they have a credit facility available where they can go and borrow the money for the principal and interest for the loans that are currently in forbearance and pay back the note owners, the investors in those. For the government loans, I don’t want to say, it’s business as usual, it’s business as unusual but there’s no imminent collapse in that area of the market. That what we call the conventional loans and ones that are backed by Fannie and Freddie, we’re on the brink. I mean this could be disastrous. All of the leaders in the mortgage industry have put together petitions and they’re out there, they’re circulating, at the end of the call me I’ll provide you with some links if you want to post this wherever you’re going to post it. Basically, it is a petition to basically get in Mr. Calabria’s face and say, dude, you’re really screwing this up, this is an imminent economic collapse that is going to make 2007 you know look like a cocktail party. All right. So, I don’t want to be doom and gloom about it, but that’s what’s happening.
Maryann: That’s part of my question for you today. I mean some of this feels eerily familiar. Quicker like this was very quick. And maybe it’ll be a quicker recovery but I think there’s going to be residual effects.
Patrick: Absolutely. The Cares Act, so a couple of contrast between what happened last time around and what’s happening now. So, what happened last time around it took weeks and months to really unfold. And to see the company is unwinding and collapse. I mean at the time when we were in the middle of it seemed to happen or really quick but retrospect. Looking back, it took weeks and months for it you know for it to unwind. And it took a long time for the government to step in and try to put programs in place to help the consumer and also help the mortgage industry. And you know and I will point out absolutely without a doubt it was the mortgage lending industry that caused the collapse last time. At this time, it ain’t my fault.
Maryann: It’s bad loans, you know.
Patrick: This time around has nothing to do with the housing or mortgage financing sector. But we’re you know one of the industries that are really being impacted. When you take a look at back it took weeks and months to unfold, you take a look at what’s happening now, probably took a couple of days to a week for all of that to come unraveled. So pretty much overnight, what is called a non-qm, the non-qualified mortgage products stuff that’s not backed by the federal programs or by Fannie and Freddie by private investors. That’s you know, the stated income stuff and yes that is up until recently that was still available in the market. Stated income, no doc type loans, when Covid19 basically took hold and all the stay-at-home orders were put it into effect, investors basically just backed away from the table and said yeah we’re not interested in that because the typical consumer that’s taking out that type of loan is somebody you know more or less in a cash business that you know, maybe doesn’t show all of their income or can’t show you all their income. So, they take out mortgage financing for a stated or no-doc type of program well you think, who’s in a cash business? Bars, restaurant owners
Maryann: Waitress, hairdressers
Patrick: Exactly. And they’re basically shut down so how the hell they’re going to pay the mortgage? Literally closed for business. So, the investors basically pushed away from the table. I won’t say all but the vast majority of lenders in that space about 48 hours, close their doors, no longer in business.
Patrick: That’s already done, that’s what happened, that was two weeks ago. That’s done. that’s over, okay. When we take a look at what happened a couple of years ago to now, it’s happening at a much much quicker pace, okay. From that sequence as to what’s happening in the industry, you’ve got several different layers and at each one of those layers, you could see that it’s going to force a company or several companies just to go into bankruptcy. They can’t handle the and again it’s short term, it could be 3 or 6 months but there’s just not enough liquidity to manage that in the short term and Calabria and FHFA are not stepping in to help.
Maryann: That’s something I want to get to today is like, how bankruptcy in your opinion is going to, will it help or will it not help some of these people with these mortgages, I mean if you’re not working in from my perspective, in what we deal with we work with people who do either a chapter 7 or chapter 13. Now chapter 13 they’re allowed to stay in their homes reorganize their debt, reorganize their payments but they have to have the ability to show they can make those payments. Let’s say they do a chapter 13 and making an arrangement with the Bankruptcy Court to repay their mortgage in and other debt, of course, over three to five years, and the Bankruptcy Court agrees, everybody agrees. Well, most of the time it’s because that person is working and they can show that they can do this. What I mean is, I don’t even know right now, is bankruptcy an option or at least a 13 for some of these people?
Patrick: Yeah. I don’t want to pass the buck on that but I think that’s really more of a legal question in terms of whether they meet the financial requirements or went into a repayment plan. Well, actually I think that’s a good segue into explaining what’s going on with forbearance and how that impacts.
Maryann Little – Short Sale Goddess is the VP of Mitigation for Short Sale Mitigation
2500 Main Street,
Tewksbury, MA 01876