April 1 could be a day of reckoning for banks and servicers anticipating a tidal wave of missed mortgage payments due to the economic fallout from the coronavirus pandemic.
With stay-at-home orders forcing some businesses to shutter and economists fearing high unemployment rates and reduced incomes, the housing finance system is grappling with how it will recoup lost revenue from missed payments, government-backed forbearance plans and other tremors.
Banks and mortgage servicers are already struggling on the front lines assisting panicked borrowers affected by the crisis, but no one knows how many homeowners could miss payments. There is growing hope that the Federal Reserve could launch a facility to provide a backstop for the mortgage system, but it is unclear how long servicers would be able to survive without government help.
“Lenders do not have the liquidity to allow borrowers to stop making payments,” said Dave Stevens, chief executive of Mountain Lake Consulting and the former head of the Federal Housing Administration. “What happens if everybody stops paying, which they will if given the option not to?”
If roughly one-quarter of residential borrowers are unable to pay their mortgage and need forbearance for three months to nine months, servicers could be on the hook for from $36 billion to $100 billion, the Mortgage Bankers Association has estimated. The median mortgage payment is roughly $1,400, according to Zillow, the online real estate database company.
“It will be a shockingly big number of borrowers that don’t make their payments on April 1," said Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America.
When unemployment numbers are released on April 3, some expect a 30% uptick in claims, with potentially 2 million to 3 million borrowers needing forbearance. Forbearance allows the borrower to defer payments interest-free until the loan is paid off.
"All those people would be eligible for forbearance but dealing with two to three million people is going to overwhelm the system," said Ted Tozer, a senior fellow at the Milken Institute and the former president of Ginnie Mae.
The bank regulatory agencies, the Federal Housing Finance Agency and the Department of Housing Urban Development recently announced a series of steps encouraging financial companies to
Meanwhile, industry representatives and lawmakers have increasingly made calls for the Fed or the Treasury Department to establish a credit facility for servicers.
But even if such a facility became available, nonbank servicers would still have to pay their employees and continue operating, including manning call centers that are increasingly overwhelmed.
The issue is further complicated because loans guaranteed by the Federal Housing Administration and U.S. Department of Veterans Affairs support low- and moderate-income homeowners who are expected to be disproportionately affected by layoffs and lost income.
When borrowers stop paying their mortgage, servicers are contractually obligated to advance principal and interest payments to mortgage-backed securities investors. Servicers maintain liquid reserves to cover these advances for loans backed by Fannie Mae, Freddie Mac, or Ginnie Mae MBS, which make up the majority of the mortgage market.
But servicers cannot survive if they have to make payments on behalf of borrowers for a prolonged period, depending on how long the COVID-19 crisis lasts. Unlike banks that have access to federal liquidity facilities, nonbank mortgage servicers rely on financing from commercial banks and private firms.
While servicers eventually get reimbursed by guarantors, most do not have enough cash on hand to make such payments, including remitting property taxes, homeowners' insurance premiums and mortgage insurance on behalf of borrowers.
For FHA and VA loans to vulnerable borrowers, the issue is even more problematic because Ginnie Mae does not directly reimburse servicers for advances when a loan goes delinquent. Instead, the servicer has to buy the loan out of the securitized pool, which requires even more cash.
Robert D. Broeksmit, president and CEO of the Mortgage Bankers Association, is calling for Treasury to create a liquidity facility to support mortgage servicers.
“Virtually no servicer, regardless of its business model or size, will be able to make sustained advances during a large-scale pandemic when a significant portion of borrowers could cease making their payments for an extended period of time,” Broeksmit said in a letter Monday to Treasury Secretary Steven Mnuchin.
On Monday, seven trade groups whose member companies play major roles in the mortgage industry sent the White House a series of recommendations on how to address the crisis.
Borrowers who have experienced economic hardship from the pandemic would receive forbearance of at least 90 days — and potentially as long as 12 months. After the forbearance period, loan modifications would be available to those who need them.
Ed DeMarco, president of the Housing Policy Council, said in a five-page letter to Andrew Olmem, the special assistant to the president for financial policy, that many mortgage servicers will not have enough liquidity to advance payments "at the extraordinary rate that we are going to need, undermining the relief efforts and requiring yet more government intervention."
"This will trigger an unprecedented need for borrower forbearance, which will strain and possibly overwhelm some servicers' liquidity reserves," the letter stated. "The systemic risks of failing to address the need where it exists could bring great harm to borrowers and to housing markets and housing finance."
The letter also was sent to Mnuchin, FHFA Director Mark Calabria, Fed Chair Jerome Powell, Consumer Financial Protection Bureau Director Kathy Kraninger, and HUD Secretary Ben Carson. The recommendations are endorsed by the MBA, American Bankers Association and Consumer Bankers Association, among others.
A nationwide forbearance plan on mortgage payments has never existed before. Mortgage experts say they were caught off guard by the FHFA’s announcement last week directing Fannie and Freddie to suspend all evictions and foreclosures for at least 60 days. A key problem is if borrowers are able to qualify for forbearance regardless of whether they were in distress due to the COVID-19 crisis.
Even during the depths of the 2008 financial crisis and Great Recession, the government never suggested or had policies in place allowing borrowers on a large scale to stop paying their mortgages.
"Moratoriums are a problem," said Brian Hale, the former president of financial services at William Lyon Homes and the former CEO of Stearns Lending, a Santa Ana, Calif., mortgage lender.
“If you tell everybody they don’t have to make their mortgage payments, how do servicers continue to pass through payments to securities holders monthly, if people are having their payments abated?” said Hale. “If they stop passing through payments, it affects the liquidity of securitization holders — insurance companies, institutional investors, large funds. This is much bigger than most people’s brains can get around.”
Roughly 70% of Ginnie issuers are nonbank lenders, including Quicken Loans, PennyMac and LoanDepot. Many are thinly capitalized and unable to support advances to MBS holders even in the short term. At the same time, Ginnie’s issuance of mortgage bonds has jumped fivefold since the 2008 financial crisis to $2 trillion.
“They just don’t have the cash to do their business,” Tozer said. "That’s the reason why Treasury or the Fed has to come through and guarantee servicer advances."
While many expect huge delinquencies on mortgage payments on April 1, another date to watch for is April 20, when Ginnie issuers are required to make payments on behalf of homeowners. Ginnie reconciles the payments, ensuring there is enough cash paid to the Federal Reserve Bank of New York, and the New York Fed pays bondholders.
“We’re running out of time because large delinquencies are going to occur on April 1, which means by April 20 there has to be something in place," Tozer said. "It will be the first indication of how much issuers have to kick in from their corporate funds to make payments to Ginnie in April."
Ginnie has a pass-through assistance program that allows it to advance payments to investors if issuers are facing a temporary liquidity shortfall that is directly attributable to a major disaster. But the program is not intended to provide long-term financing, and requires Ginnie to declare the servicer is officially in default, which could trip other convenants in lending agreements, Tozer said.
Chris Whalen, chairman of Whalen Global Advisors, is among those warning that what began as a public health crisis has quickly turned into a liquidity crisis.
“Liquidity is drying up in the short-term mortgage financing market for loans, mortgage-backed securities and servicing advances,” Whalen said. “Markets need this fixed to have collateral for any national liquidity program involving Ginnie Mae loans.”
The lack of liquidity also has forced real estate investment trusts and other big institutional investors that hold mortgage-backed securities to begin selling at reduced prices to raise cash. Warehouse lenders that provide liquidity to mortgage servicers and are funded by large banks have started making margin calls on entire pipelines of mortgages held by mortgage bankers, who in turn are trying to sell into an illiquid market.
“An unprecedentedly volatile agency MBS market could drive important market participants into insolvency if not rectified,” the MBA’s Broeksmit warned.
