How will the student loan decision impact mortgage servicing?

Consumers struggling to pay college bills could face more financial difficulties with legal challenges impeding attempts at student debt cancellation and forbearance for federal loans of this type ending, but some things will minimize mortgage impacts.

When interest-free federal student-loan forbearance ends later this year, borrowers will have a 12-month reprieve between Oct. 1 and Sept. 30 of next year from late fees, adverse credit reporting or referrals to debt collection agencies. Some loans may have more payment flexibility.

“Borrowers are going to have a little bit of time to pull things together and get back into positive habits for repayment without their credit being impacted,” said Sara Parrish, president of CampusDoor, an Incenter company that provides white-labeled private student-loan services.

“It may just kick that can down the road just a little bit but I do feel that given that amount of time to get used to it again, as long as that’s implemented in a way that does encourage people to get back into the swing of repayment, that’s going to lessen the blow,” she added.

Given these measures and the fact the overall economy remains strong, some think the resumption of student loan payments won’t probably do much more than lift consumer-debt delinquency rates among more credit-sensitive borrowers half a percentage point at most. 

“I’m sure there will be 50 articles written [saying that] we’re falling off a cliff and we’re going into recession. In reality, it’ll be a lot to do about nothing,” said Vadim Verkhoglayad, vice president and head of research at dv01, a data management, reporting and analytics platform for lending markets.

Mortgage performance in particular may be insulated because, with rare exceptions, borrowers generally prioritize loans they pay to keep a roof over their heads before other obligations.

The other question for mortgage companies has to do with the impact on lending prospects given that the Biden administration had hoped to offer up to $20,000 in student debt cancellation for more than 40 million borrowers earning less than $125,000 per year.

All along, many home lending professionals have been cautious about counting on that broader forgiveness as a source of potential mortgage leads, focusing instead on more limited student loan relief that actually has materialized to some degree in the past year or so.

While some of the relief like interest-free forbearance has been temporary, mortgage companies may not see a big change in who qualifies for mortgages when it ends in the fall because even borrowers with payment suspensions were assessed as if their full debt obligation was in force.

“We’ve never stopped counting as a monthly payment for a student loan, even though it was in forbearance,” said Melissa Cohn, regional vice president at William Raveis Mortgage.

However, there are some questions about how the resumption of interest and payments will affect overall debt-to-income ratios that can be a determining factor in whether a consumer can qualify for a mortgage. More than $1.7 trillion in U.S. student debt is outstanding.

While putting student loan payments in interest-free forbearance theoretically could have allowed borrowers involved to potentially direct the suspended payments into paydowns of other types of debt, find likely did or could.

“In many cases, it was not spent to bring down the outstanding debt that they have,” Parrish said.

There could also be complications for mortgage companies considering that student loan servicers have been through consolidation. Some borrowers might have trouble identifying which one is currently handling their loan.

“It is a very good chance that you’re not making your payment to the same servicer that you were making your payment to when these student loans went into forbearance,” said Parrish, whose company provides student loan services to nonbank and depository mortgage lenders.

Mortgage companies as well as borrowers might want to be careful about communications involving student loan servicers for that reason, particularly given that misinformation that leads to an undisclosed debt in home loan underwriting could result in repurchase risk.

While all these student loan developments can challenge mortgage companies, legal barriers to widespread forgiveness for education debt and end of forbearance also have an upside in reducing payment disincentives on the part of some people not afforded relief.

Cohn said limiting debt cancellation to groups like public servants with good loan-performance track-records reduces resentment among those left out of relief, who have raised questions like, “Why should our taxpayer dollars support others and why can’t I get forgiven?”


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