While the nation deals with an unprecedented health crisis, leading unemployment claims to grow at record rates, the federal government has taken steps to protect homeowners undergoing financial hardship.
However, some worry that mortgage servicers may face liquidity shortfalls as a result of the government's attempts to relieve pressure on struggling homeowners.
Unemployment skyrocketed to 6.6 million at the end of March, leaving many Americans without an income to meet their ongoing financial obligations, such as their mortgage payments.
In response to this and other economic strains stemming from the COVID-19 pandemic, the Trump administration is issuing six months’ forbearance on government-backed mortgage loans with a possible extension of an additional six months’ forbearance. Now the industry is working to both implement those plans and to ensure that the mortgage market itself remains stable as our nation navigates this turbulent time.
“Congress hasn’t made the repayment obligation disappear, but simply moved it from the borrower to the mortgage servicer,” stated Mike Calhoun, Jim Parrott, and Mark Zandi in an article published on CNN Business.
While the article acknowledges that the government-backed loans will “eventually be paid back by the government,” it points out that servicers must cover the cost in the meantime, and the government payment “can take upwards of a year.”
If one in four families forgo mortgage payments for six months, that comes out to more than $70 billion that mortgage servicers must cover in the interim.
The authors of the piece explain that this compares to just $10 billion in total net profits for mortgage servicers during all of 2019.
Under these circumstances, “Only the very largest, best-capitalized servicers would be able to handle that kind of strain,” the experts claim in their article. “The rest would falter, and many would fail altogether.”
While some mortgage servicers are divisions of large, well-capitalized banks, others are smaller nonbank firms. Not only are they smaller, but they are also not subject to the same capitalization requirements as their bank counterparts.
The Federal Reserve expressed some concerns with nonbank servicers in a report late last year, saying, “The nonbank structure is vulnerable to liquidity and funding risks. The new post-crisis generation of nonbanks seems vulnerable to liquidity pressures similar to those that nonbanks were subjected to during the financial crisis.”
The report also detailed the increasing presence of nonbanks in the mortgage servicing sector. Nonbanks gained a rapid share of mortgage servicing as well as loan origination following the financial crisis of 2008. In fact, when analyzing the loans serviced by the top 25 loan servicers in the nation, just 4.0% were serviced by nonbanks in 2008. The share jumped to 42.3% by 2018, according to the Fed.
If the mortgage servicing industry experiences major disruption, the impact could be detrimental to the market. If mortgage servicers fail, struggling homeowners would have difficulty finding help. Also, as many companies both service and originate loans, homebuyers would have a harder time obtaining loans as the market begins to recover.
Ultimately, the piece argues, “policymakers have a choice. They can step in now and address the massive cash-flow problem faced by mortgage servicers, either by advancing these payments directly to investors or by lending servicers the money to do it themselves.”
Various government agencies have already been working to address this issue in recent weeks, with Ginnie Mae last week announcing an All Participants Memorandum that expanded its servicer assistance program in response to the spread of COVID-19.
Editor's note: MReport reached out to both the White House and HUD for comment on this piece. As of press time, we have not received a response.