The Economy

Mortgage Relief Could Cripple Loan Servicers

Forbearance programs would cause liquidity problems for nonbank mortgage providers, the industry says.
Vincent RyanMarch 27, 2020
Mortgage Relief Could Cripple Loan Servicers

Mortgages represent the lion’s share of household debt, so the mortgage industry may play a critical part in seeing consumers through the COVID-19 pandemic.

But mortgage bankers and nonbank mortgage providers are worried that the $2 trillion stimulus package passed by the House of Representatives on Friday will harm originators and the mortgage supply chain. In particular, they said mortgage servicers (the companies that collect and credit monthly loan payments) are in danger of seeing their liquidity dry up.

The Coronavirus Aid, Relief, and Economic Security Act lets homeowners hurt by the public health crisis to postpone mortgage payments for up to 12 months. (Mortgage giants Fannie Mae and Freddie Mac announced they were taking that step last week.) But the private mortgage industry says it will need assistance (some financial) from the federal government to provide widespread mortgage debt relief for households.

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In a joint letter this week to federal banking agencies and the Department of Housing and Urban Development, mortgage industry groups said they need additional guidance from government-sponsored enterprises and government agencies to establish the forbearance program; waivers of some policies and practices that “that may add unnecessary delay and friction”; and “streamlined approaches to customer notification or documentation” to make relief happen quickly.

Mortgage providers are also seeking to ensure that mortgage originations and closings “do not grind to a halt.” Those processes have been disrupted by the social-distancing precautions instituted to stem the pandemic.

For example, the letter pointed out, “it is now is difficult if not impossible for loan originators to communicate with a prospective borrowers’ employer to verify employment status, to complete the necessary paperwork with ‘wet signatures’ validated by notaries, and to obtain property appraisals when many professionals are subject to mandatory isolation and telework policies.”

The biggest risk to the mortgage supply chain, though, is that as consumers delay mortgage payments nonbank mortgage servicers will have to step in for borrowers and pay the principal and interest to mortgages to investors, as well as pay the real estate taxes, homeowners’ insurance, and mortgage insurance.

“To give a sense of scale,” the industry groups noted, “if 25% of the nation receives forbearance for only 3 months, servicers will have to cover payments of roughly $36 billion. If 25% of borrowers received it for 9 months, then the cost would exceed $100 billion.”

Nonbank mortgage servicers “will not have enough liquidity to advance these payments at the extraordinary rate that [they] are going to need,” the letter states, as they do not have access to existing Federal banking liquidity facilities. Therefore, the letter asks the government to provide “a temporary government backstop liquidity source.”

“This is a cash-flow issue — a matter of making sure that servicers have the money to cover for borrowers while waiting to be reimbursed,” the letter continues. “If policymakers address it now, as a liquidity issue, it will cost much less than if they wait and it becomes a solvency issue.”

The industry groups said they are prepared to assist in developing detailed plans for how to implement such temporary liquidity support.

Nonbanks service 47% of outstanding mortgages compared to 6% in 2009, according to the Financial Stability Oversight Council.

The letter is signed by the Mortgage Bankers Association; the American Bankers Association; the Consumer Data Industry Association, which includes Experian, Transunion, and Equifax; the Structured Finance Association, the National Mortgage Servicing Association, and US Mortgage Insurers.