Accounting & Mortgage Forbearance due to COVID-19
Articles by: Richey May, Jun 17, 2020
Among the many evolving issues mortgage lenders face today, mortgage forbearance due to COVID-19 is one of the most talked about and closely monitored. While significant efforts have been made across the industry to ensure borrowers understand their forbearance options and to ensure originators and servicers understand how to carry-out the programs offered by investors and guarantors, many are left wondering “how will all of this impact my financial picture? With the rest of the world making sweeping changes to accommodate the unprecedented circumstances, should I expect changes or new guidance when it comes to accounting?”
Below we detail the most common themes of conversations we’re having about forbearance. As opposed to offering answers, we hope to shed light on some questions and thoughts for your consideration.
Although FASB has not issued much accounting guidance specifically related to the CARES Act, there have been some updates regarding the effective dates of Revenue Recognition and Lease Standards as well as temporary relief from CECL Standards . Additionally, in a Joint Statement from various regulatory agencies, FASB agreed that loan modifications should be encouraged and will not require all supervised institutions to treat COVID-19 loan modifications as Troubled Debt Restructurings (as outlined in ASC-310-40). This includes short term modifications, like payment deferrals, fee waivers, and extensions of terms.
Loan Loss Reserve
FNMA, FHLMC, and HUD all have announced temporary flexibility when it comes to certain originating, underwriting, and selling requirements, such as, verification of employment, income, credit, appraisals, and more. Additionally, HUD announced that a mortgage with FHA insurance endorsement for a borrower experiencing COVID-19 hardships are subject to two-year indemnification agreements. With uncertainty surrounding potential increases in delinquencies and foreclosures post-forbearance, and thus, increased indemnifications and repurchases, a lender’s loan loss reserve may be significantly impacted.
P&I/T&I Servicing Advances, Liquidity Issues
Due to the devaluation of servicing released premiums during COVID-19, many lenders have opted to retain servicing on most of their originated loans. However, servicers/issuers have been facing liquidity concerns since, depending on the remittance type, they may be required to advance large P&I and T&I amounts on behalf of borrowers in forbearance. For Actual to Actual loans, lenders need only advance whatever P&I is received from borrowers to investors each month. However, for Schedule to Schedule loans, which require P&I to be advanced, and Schedule to Actual loans, which require interest to be advanced regardless of what was received, the lender’s portfolio makeup may require a higher cash outlay. To curb these liquidity issues, FNMA and FHLMC have implemented a four-month advance obligation limit on loans in forbearance. However, GNMA loans will still be treated as they have previously. See ASC 310-10 Receivables for accounting guidance related to recoverable advances and potential allowances for unrecoverable amounts.
Historically, FNMA and FHLMC loans that were more than four months delinquent were repurchased out of MBS pools. However, FHFA released a statement encouraging the Enterprises to leave the loans in pools at least during the forbearance period and is considering them natural disaster events. GNMA still offers the option to buyback loans that are delinquent greater than 90 days. Per ASC 860-10 Transfers and Servicing, if the issuer has the unilateral right to repurchase the loan and there is more than a trivial benefit to do so, regardless of whether the issuer plans on repurchased the delinquent loans or not, an asset and corresponding liability should be recorded on the balance sheet.
Servicing Fee Income
Recognizing servicing fee income varies across contractual obligations with investors. It is now also impacted based on how the post-forbearance plans are structured. ASC 310-20 Receivables discusses interest accruals and what happens if interest rates change during the original term. It is also important to comprehend the difference between forbearance and deferment plans. Forbearance implies interest should continue to be accrued, whereas it situationally varies in deferment plans.
COVID-19 is bringing uncertainty to mortgage lenders that will continue to evolve. Lenders should be flexible when navigating this unpredictable climate and now is the time to anticipate scenarios to create crisis plans that fit their operating model. Over the next several months we will continue to track and publish evolving accounting implications and stay committed to assisting mortgage lenders maintain resiliency while adapting to whatever’s thrown at the industry.
For more information regarding accounting conerns from mortgage forbearance due to COVID-19, please reach out to us.