Under the recently signed CARES Act, borrowers do not need to show any proof of financial hardship in order to skip payments for up to a year. All homeowners would need to do is say they can’t pay, leading Federal Housing Finance Administration (FHFA) Director Mark Calabria to urge borrowers to “be honest,” CNBC reports.
“We’re operating on the honor system,” Calabria said. “We are asking and we’re putting together a script for servicers. This is supposed to be limited to if you’ve lost your job, you’ve lost income. Please, if you haven’t lost your job, continue paying. If you can pay your mortgage please do so because we really need to focus on the people who can’t.”
Despite the honor system in place, borrowers will still have to provide documentation when setting up their repayment plans.
According to Calabria, up to 2 million borrowers could be applying for loan forbearance by May and said that mortgage servicers, as well as Fannie and Freddie, could handle that if it was just for a few months.
“If this goes beyond two or three months and we start to get worse than that, then that’s going to be a lot of strain, and certainly we’re going to start to see some firms get into a lot of liquidity trouble,” he added.
FHA loans, CNBC reports are more vulnerable than the rest of the relatively healthy market.
“The truth is that subprime really didn’t as much go away as it went into FHA, so you have a lot of FHA borrowers who I think are vulnerable. The real question is the duration of this,” Calabria said.
“If this is something that goes on for six months or more, then I think you’re going to continue to see a lot of stress, and I would really emphasize the place to look right now is the FHA market, with the credit quality of their borrowers,” he adds. “They’re really going to be the first canary in the coal mine in terms of what the broader implications are going to be.”