The Federal Housing Finance Agency, regulator of Fannie Mae and Freddie Mac, has announced that the two mortgage giants will now buy home loans that will enter the government’s forbearance program right after they close.

Fannie and Freddie hadn’t done this and as a result the loans had tightened considerably.

“We are working to make the mortgage market work for current and future homeowners during these difficult times,” FHFA Director Mark Calabria said in a statement. “Purchases of these previously ineligible loans will help provide liquidity to the mortgage markets and allow originators to continue lending.”

Mortgage lenders, both bank and non-bank, sell most of their loans to Fannie Mae or Freddie Mac, known as Government Sponsored Companies, or GSEs. Or, if they are backed by the FHA, they are sold to Ginnie Mae. It may take a few weeks after a loan is closed for it to be sold. When the government’s mortgage bailout began just over a month ago, some loans that had just closed but had not yet been purchased were forborne.

The forbearance program allows borrowers in economic difficulty due to Covid-19 to delay monthly payments for up to one year. These payments must be made at a later date. The CARES law, which was enacted late last month, does not require borrowers to provide documents or evidence of hardship.

Over 3 million loans are already part of the forbearance program. Because Fannie and Freddie would not buy the loans that had just closed, credit tightened considerably, making it more difficult for all borrowers to get a new loan. Lenders were concerned that the loans they made would be forborne before being sold, leaving them unable to sell them.

This announcement should ease the market somewhat, although there are certain criteria and eligibility limits, according to the FHFA:

• The mortgage must have been closed on or after February 1, 2020 and no later than May 31, 2020.
• The loan must be a mortgage purchase transaction or cashless refinance.
• The loan cannot be more than 30 days past due.

In addition, eligible loans will be subject to an additional price adjustment at the loan level – 5% for first-time buyers and 7% for non-first-time buyers.

There is, however, disagreement on what these higher costs might affect mortgage rates. Some say they could lower mortgage rates slightly as the credit box opens further. Others say some lenders will pass these costs on to borrowers in the form of higher rates.

“We welcome the policy change that requires GSEs to buy most loans by forbearance,” said Bob Broeksmit, CEO of the Mortgage Bankers Association. “We [are] I look forward to working with FHFA and GSE to achieve more appropriate pricing and broad coverage for all types of transactions. “