Mortgage Companies Make Money From Your Patience Plan

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When homeowners suspended mortgage payments at the onset of the Covid-19 pandemic, their mortgage companies found a way to make money.

Mortgage companies have increased their leniency purchases of government-backed mortgages and are selling these loans back to investors at a profit. Trade is made possible by policies aimed at reducing the government’s burden of mortgages that the homeowner does not pay.

The so-called early buyout deal, an obscure but lucrative part of the mortgage business, is used by many mortgage companies, including the three largest:

Rocket Kos.,

PennyMac Financial Services Inc.

PFSI -0.13%

as well as

Wells Fargo

WFC 0.60%

& Co. It added what was already there banner banner for the issuance of a mortgagefueled over the past year by refinancing and relocation to suburbs caused by a pandemic

Investors are eager to get these loans. Many of them were made long ago and therefore have higher interest rates than current ones. Another attractive factor is that investors believe that many of these borrowers are unlikely to refinance in the near future. Refinancing hurts investors because it closes one mortgage and thus takes away their income stream

As investors in US rental homes are buying up single-family homes, some investors are buying homes through sale-and-leaseback deals that offer needy homeowners a way to pay off debt while staying in their home. But many experts fear that they may never become homeowners again.

Here’s how an early buyback trade works:
  • When mortgages are issued through FHA or Department of Veterans Affairs programs, they are usually combined with other Ginny Mae bonds. Ginnie Mae is a government-owned mortgage corporation that provides bonds sold to investors.
  • Later, if that borrower stops making payments, Ginny Mae’s rules allow the mortgage agent to buy it out of the pool after 90 days at par. This means that the mortgage company pays an amount equal to the outstanding principal and interest due at the time.
  • The mortgage company then works with the borrower to repay the current amount again, for example, allowing the homeowner to offset missed payments at the end of the loan term.
  • Once the borrower has resumed payments, the mortgage company sells the loan back to a new pool that investors buy, often for a larger amount than what the mortgage company paid.

About 840,000 FHA and VA loans were on hold this month, or 6.9% of that market, according to data

Black Knight Inc.

In the 12 months leading up to May, mortgage companies bought about $ 140 billion in Ginny Mae loans that homeowners were patient with or otherwise failed to pay.

Jp morgan chase

& Co. Ginny Mae data analysis. You can get about $ 94 billion more.

Now that some of those loans are working again, according to JPMorgan analysis, in May alone, $ 7.8 billion was repackaged in bonds.

In normal times, this practice is intended to give mortgage companies more flexibility in dealing with overdue loans and reduce the government’s role in dealing with them. It also means that mortgage companies no longer have to make sure that investors receive money. Otherwise, the mortgage company is usually responsible for paying the principal and interest to the investors, even if the homeowner does not make the payments.

Michael Drane, acting executive vice president of Ginnie Mae, said the robust NPL market enhances the overall appeal of the Ginnie Mae program. (Although investors consider delinquent loans to be overdue, they should not be reported to credit agencies as delinquent.)

When the pandemic broke the government allowed millions of borrowers to temporarily stop paying mortgage loans, increasing the number of loans that service companies can redeem. And the market viewed them as a relatively safe bet, believing the economy would recover by the time homeowners start paying again.

At the same time, some investors have complained about the buyback because they are losing their income stream from borrowers whose loans are no longer in the pool. This led Ginny Mae to adjust the program last year

PennyMac reported nearly $ 284 million in revenue from these buyouts, including interest income and reallocation income for the first three months of the year. For comparison: a year earlier it was less than $ 48 million.

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Rocket recently announced that its funding for these events nearly doubled to nearly $ 636 million in the first quarter from the fourth quarter.

Last year, Wells Fargo bought out $ 30 billion in mortgages that stopped homeowners from paying. A bank spokesman said share buybacks had long been a normal practice, then “increased significantly in the second half of 2020” and returned to normal in 2021.

Write to Ben Eisen in ben.eisen@wsj.com

Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Published in the June 17, 2021 print edition, Mortgage Firms That Earn With Patience.

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