Senators urge oversight council to provide relief to mortgage servicers
A bipartisan group of senators is calling on the Financial Stability Oversight Council to provide temporary liquidity to mortgage servicers overwhelmed by requests for forbearance due to the coronavirus pandemic.
Sens. Mark Warner, D-Va., Mike Rounds, R-S.D., Tim Kaine, D-Va., Jerry Moran, R-Kan., Bob Menendez, D-N.J., Thom Tillis, R-N.C., and Tim Scott, R-S.C., urged Treasury Secretary Steven Mnuchin in a letter Wednesday to direct money Congress authorized in the CARES Act to address liquidity challenges they expect mortgage servicers to face in the upcoming weeks. The legislation authorized $455 billion for purposes of economic stabilization activities.
The senators warned that mortgage servicers will not be able to cover growing obligations to their investors, as borrowers get forbearance on federally backed mortgages afforded by the CARES Act.
“Given the magnitude of the economic stress that many Americans will face as a result of the virus, and the early numbers we are seeing from lenders across the country, it is likely that many families will be unable to make their payments as scheduled, triggering widespread participation in the program, with potentially up to 25% of borrowers seeking assistance,” the senators wrote. “Therefore, we are calling for immediate action to avoid an impending crisis in the mortgage servicing sector, that could further threaten the mortgage market.”
The request comes as mortgage servicers have renewed calls for aid from the Federal Reserve and Treasury Department after the head of Federal Housing Finance Agency said that nonbank servicers will get no relief from Fannie Mae and Freddie Mac.
The Mortgage Bankers Association called comments by FHFA Director Mark Calabria “troubling” and said they underscore the need for the Federal Reserve and Treasury Department to create a liquidity facility to help mortgage servicers.
Calabria said Tuesday that he does not expect big increases in forbearance requests from homeowners, and that liquidity issues are confined to nonbanks that service primarily Federal Housing Administration loans that cater to low- and middle-income borrowers. He said “a small minority of firms are experiencing stress.”
“We’re not at this point where we’re necessarily expecting anyone to fail,” Calabria told Housing Wire. “So, some of this really is a matter of people just not wanting to take a markdown price for their assets to raise liquidity. But we’re seeing players do that, which is appropriate.”
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Meanwhile, Moody’s Investors Service said there is a heightened risk that rising borrower delinquencies will strain the liquidity of nonbanks that service a majority of mortgages backed by Fannie Mae, Freddie Mac and the FHA.
Servicers are required to advance principal and interest payments to investors when borrowers do not pay their mortgage. While most servicers are able to meet these advances for April, it is unclear if they can cover payments in May. The Mortgage Bankers Association has estimated servicers could be on the hook for $75 billion to $100 billion in advances if roughly one-quarter of residential borrowers are unable to pay their mortgage and need forbearance for six to nine months.
Homeowner requests for forbearance have skyrocketed since the FHFA first announced a 90-day foreclosure moratorium last month. The Coronavirus Aid, Relief, and Economic Security Act went further, giving borrowers with federally-backed loans six months' forbearance and a further six months' extension if they ask for it.
Robert D. Broeksmit, the MBA’s president and CEO, said Calabria’s comments send a troubling message to borrowers, lenders and the mortgage market.
“The Director’s unwillingness to offer support from Fannie Mae and Freddie Mac for the very firms that he and Congress asked to execute his agency’s forbearance plan only reinforces why the Federal Reserve and U.S. Treasury must create a financing program to help residential and commercial/multifamily mortgage servicers who will have to provide unprecedented levels of mortgage payment forbearance,” Broeksmit said in a press release.
Calabria threw cold water on the notion that forbearance requests will be widespread.
“Nobody that we’re talking to is seeing 25%, 30%, 40%, 50% take out (in forbearance requests),” Calabria said. “So, I don’t know where those estimates are coming from, because they just don’t match anything we’re seeing at all.”
As of April 1, independent mortgage bank servicers had the largest share of loans in forbearance at 3.5%, while banks had 2.24% in forbearance, the MBA said. Loans in forbearance hit 4.25% for backed by FHA and other agencies that are supported by Ginnie Mae, the MBA said.
When 10 million people filing for unemployment, servicers expect a 20% to 30% of homeowners will ask for forbearance on their loans. Forbearance allows the borrower to defer payments interest-free until the loan is paid off. Roughly 80% of loans are guaranteed by the government. But the remaining 20% held by banks, credit union and nonbanks are not covered by the CARES Act.
Moody’s Associate Managing Director Luisa De Gaetano said rising borrower delinquencies will strain nonbanks' liquidity.
“In a scenario in which multiple servicers failed concurrently, servicing transfers would be more difficult to execute, creating additional risk to servicing quality and transaction performance,” she said.
Calabria said on April 1 that the COVID-19 crisis would result in higher delinquencies than the 2007 mortgage crisis, which he attributed primarily to subprime mortgages. He also said the crisis will not alter the government-sponsored enterprises’ path out of conservatorship, other than possibly delaying it.
He said the GSEs could expect 700,000 forbearance requests from borrowers with Fannie- and Freddie-backed loans but servicers have said requests have already exceeded that amount for April payments alone.
Calabria is trying to preserve the safety and soundness of the GSEs and has said Fannie and Freddie do not have the capital to provide funding to servicers. If the GSEs were to provide funding for servicing advances, they would have to finance the advances by issuing debt, which would expand their balance sheets, something Calabria is unwilling to do, according to analysts at Keefe, Bruyette & Woods.
Mortgage experts still think the Fed will use its authority to create a funding facility but that “is unlikely to happen until the GSEs start seeing a meaningful increase in forbearance activity, KBW said in a research note Wednesday.
Nonbanks service roughly half of all outstanding mortgages, and 70% of loans to low- and moderate-income borrowers backed by the FHA, and other agencies.
Last year the Financial Stability Oversight Council said that nonbank mortgage servicers pose a special risk because they service a disproportionately high ratio of government-backed mortgages, primarily FHA loans, which tend to have higher default rates during economic downturns. An FSOC report noted that “most nonbanks rely heavily on short-term funding sources and generally have relatively limited resources to absorb financial shocks.”