Users can stress loans for a start of Forbearance, which is when a loan temporarily pauses payments and further payments are deferred. The loan will resume payments at the end of the forbearance period until maturity.
T-REX allows for the simulation of loan forbearance through the Scenario analysis. The user can define the portfolio's percent that will transition into Forbearance, the length of the Forbearance Term, and the Forbearance Policy.
Fields:
Under the Scenarios tab, within Loan Parameters. There are three Forbearance Parameters:
1. Forbearance Rate
2. Forbearance Term
3. Forbearance Policy
Forbearance Rate:
A numeric vector that sets the percentage of the pool that will transition into forbearance at a certain period.
Example 1: If the vector is set to 1:0; 2:0;3:100;4:0, it means that 100% of the pool will transition into Forbearance at Period 3.
Example 2: If the vector is set to 1:0;2:0; 3:40;4:0;11:0; 12:10;13:0, it means that 40% of the pool will transition into Forbearance at Period 3, and an additional 10% of the loan pool will transition into Forbearance at Period 12. In total, 50% of the pool is in Forbearance.
Important to Note: Forbearance can not exceed 100% of the pool or within a Scenario Group.
Forbearance Term:
The number of months the forbearance will last. The term will apply to any forbearance event set at the forbearance rate vector.
Forbearance Policy:
T-REX offers four different types of forbearance, which can be seen in the drop-down. By default it is set to No Payment/Balloon.
During Forbearance Term:
- No Payment means no payments at all are made during forbearance. The interest is compounded, and the balance is capitalized.
- Interest Payment means that only the interest for the forbearance portion is paid during the forbearance period.
After Forbearance Term:
- Balloon means that the payments will not change after the forbearance period, and will be the same as they were before the forbearance. Any overhead debt accumulated during forbearance is paid as a Balloon loan at the last loan period.
- Recast means that the affected loan will amortize after the forbearance period, resulting in a new, higher payment, that will reflect the debt accumulation during forbearance.
Cash Flow Report Example
There is a loan that is affected by forbearance at a 100% rate at Period 3. The forbearance period is 6 months, the policy is No Payment/Balloon.
The total monthly payment of $73,610 remains the same after loan payments resume.
At Period 120, which is the last period of the loan, the remaining balance is paid fully $608,055, as a balloon loan.
Forbearance Fields
Forbearance fields can be found in the Custom Cash Flow Report. There are five fields related to forbearance: Forbearance Balance, Non-Forbearance Balance, Forbearance Interest deferred, Forbearance Interest Only and Non-Forbearance Interest.
- Forbearance Balance: Total balance that is in forbearance, at end of the period.
- Non-Forbearance Balance: Total balance that is NOT in forbearance, at end of the period.
- Forbearance Interest Deferred: Interest accrued on forbearance balance (Relevant at No Payment mode).
- Forbearance Interest Only: Interest paid on forbearance balance( Relevant at Interest Payment mode).
- Non-Forbearance Interest: Interest paid on Non-forbearance balance.
Example below, with the same simulation but a different policy. Interest Payment/Recast.
$13,132 of interest is paid during the forbearance term. When payments resume at period nine, the Total payment is recast and increase from $73,610 to $77,180.
Important to Note:
When creating a scenario with forbearance, the scenario cannot include prepayment, default, or loss scenarios.