The next financial crisis: A collapse of the mortgage system
The mortgage finance system could collapse if the Fed doesn’t step in with emergency loans tooffset a coming wave of missed payments from borrowers crippled by the coronavirus pandemic.
The Federal Reserve building. | J. David Ake/AP Photo
The U.S. mortgage finance system could collapse if the Federal Reserve doesn’t step in with emergency loans tooffset a coming wave of missed payments from borrowers crippled by the coronavirus pandemic.
Congress did not include relief for the mortgage industry in its $2 trillion rescue package — even as lawmakers required mortgage companies to allow homeowners up to a year’s delay in making payments on federally backed loans.
When individuals stop making payments on their home mortgages,the companies that handle the loans and process those payments, so-called mortgage servicers, are still on the hook: They’re legally obligated to keep sending money to insurers and investors in mortgage-backed securities, the giant bundles of home loans that are packaged and sold on the securities markets.
Now industry executives and regulators are worried that Congress’s generosity toward homeowners could wipe out those companies, causing investors not to get paid and potentially bankrupting the entire mortgage finance system — a domino effect that would make it much harder for borrowers to access credit to buy homes.
Housing lobbyists sounded the alarm to Senate staff about the potential danger, but the sheer scale of the rescue bill and the focus on communicating the industry’s other big concerns — such as the details of how long mortgages would be suspended — meant their warnings were unheeded in the rush to finish the massive legislation.
Yet while the final bill allocates $454 billion for the Treasury Department to support the Federal Reserve’s emergency lending programs, including for large corporations, there is no overt requirement for lending to mortgage companies, despite a weeklong lobbying push by the industry.
“There was a strong desire on the part of housing lobbyists to have the bill explicitly direct the Fed and Treasury to use some of that money to finance servicing advances,” said Michael Bright, CEO of the Structured Finance Association, which represents 370 financial institutions in the bond market.
Now industry lobbyists are turning their efforts to Trump administration officials.
“We have been in constant contact with many parts of the administration to ensure that they understand the urgency of this liquidity facility being set up,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association, a trade group.
On Thursday, Treasury Secretary Steven Mnuchin said the Financial Stability Oversight Council — a powerful interagency body that consists of the top financial regulators — is “particularly focused on the liquidity issues that market may have.” Mnuchin said he was establishing a task force to report back to the council on the matter on Monday.
Concerns about liquidity in the mortgage finance system have been building for years, as the companies that service mortgage loans are increasingly nonbanks — which don’t have banks’ access to Fed loans or their strict capital requirements and deposits to fall back on. Banks, which once dominated the business, have steadily pulled back since the 2008 housing market meltdown.A breakdown of the $2 trillion stimulus billSharePlay Video
Usually, a mortgage company can withstand a few borrowers failing to make payments, but the breadth of the coronavirus pandemic has sparked industry estimates of between 25 and 50 percent of borrowers being unable to pay.
That “could threaten the ability of a mortgage servicer, particularly nonbank servicers, to remain a going concern,” the Conference of State Bank Supervisors warned Fed Chair Jerome Powell and Mnuchin in a March 25 letter.
State regulators wanted to weigh in because “our members are the primary regulators of the nonbank servicers,” said Margaret Liu, CSBS senior vice president and deputy general counsel.
If 25 percent of borrowers fail to make their mortgage payments, the industry would need $40 billion to cover three months of payments, according to Jay Bray, CEO of the servicing company Mr. Cooper. Depending on how long the situation lasts, Broeksmit said demands on servicers “could exceed $75 billion and could climb well above $100 billion.”
And if mortgage companies fail across the board, “the system breaks down,” said Andrew Jakabovics, vice president for policy development at Enterprise Community Partners, an affordable housing nonprofit.
“The kinds of relief we did during the foreclosure crisis — all of that had to do with the fact that we wanted to ensure that investors from across the world would continue to treat U.S. mortgage-backed securities as an incredibly safe investment,” Jakabovics said. “That would have very serious ramifications for the availability and price of mortgage credit.”
“Even though that language wasn’t included [in the Senate bill], I do think it’s likely that this could be part of [the Fed’s Term Asset-Backed Loan Facility Program] in the end,” he said.
Federal Housing Finance Agency Director Mark Calabria — who regulates Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants that prop up about half of the nation’s $11 trillion market — said this week in a Bloomberg TV interviewthat he was confident that large banks would continue to extend credit to mortgage servicers for the time being.
Still, he said, “if we get to a situation where this goes longer than two months, absolutely there’s going to need to be a bigger solution.”
Broeksmit said some mortgage companies won’t make it that long, depending on the share of loans in their portfolios located in areas of the country where the virus has hit particularly hard.
“Some servicers will need the liquidity sooner than others, so we’re hoping that the facility will be set up immediately,” Broeksmit said.
Liu also said the credit lines from banks wouldn’t be enough to keep the system afloat.
“The mortgage market is one of the many multiple complexly interconnected pieces of our financial system, so those assurances are really important, but I think the role of the government in being a reliable and available source of credit for the mortgage market and mortgage servicers during a crisis is even more important,” she said.
In the meantime, the industry is crossing its fingers that the individual cash relief in the Senate bill will lead to fewer people needing to request forbearance on their payments.
“We’re hoping that the take-up rate won’t be too high and that the duration is not extended, but we have to prepare for both,” Broeksmit said.