Without corrective action, Congress’ coronavirus stimulus package could crash the mortgage industry across the nation.
As reported by Fox Business, “a series of missteps and outright errors in judgment by federal regulators are turning a bad situation in housing into a calamity that may lead to a U.S. debt default.”
The CARES Act, as explained well here by CNBC, mandated “that all borrowers with government-backed mortgages — about 62% of all first lien mortgages according to Urban Institute — be allowed to delay at least 90 days of monthly payments and possibly up to a year’s worth.”
Mortgage servicers, even when not receiving mortgage payments from residents, still have to pay mortgage bond holders, as well as taxes owed on the properties. While this puts an obvious squeeze on servicers, the effects could be far more reaching up the mortgage ladder.
Here’s how Fox Business described the process:
The mortgage industry is essentially a large cooperative network. The homeowner pays the mortgage. The bank or nonbank loan servicer transfers the payment to a bond investor and retains a small fee. The loan servicer also pays the property taxes and insurance on the property, protecting not only the home but the municipal finances of communities around the country. The total flow of interest, principal, taxes and insurance made by banks on behalf of homeowners runs into the tens of billions of dollars every month.
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If the issuers in the $2.2 trillion government loan market or the $5.5 trillion conventional loan market fail to make the bond payments to investors, then the Treasury must step in to honor the guarantee.
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The accumulated defaults on payments of interest and principal are forming a financial tsunami that could ultimately force a US debt default unless steps are taken now to prepare for this peak in loan forbearance.
As reported by CNBC, Laurie Goodman, co-director of the Housing Finance Policy Center at Urban Institute, has predicted a worst-case scenario of nearly 12 million borrowers receiving some kind of forbearance under the CARES Act at a total cost of $66 billion for six months. Mark Zandi, chief economist at Moody’s Analytics, predicted approximately 15 million households would receive some forbearance on their home loans.
No matter if these two estimates end up being on the high side, servicers do not have nearly enough cash to cover payments to bondholders over the coming months. Not only is the mortgage industry in danger of disaster, but the U.S. Treasury could be hard hit as a result.
Action can still be taken by the Trump Administration to help fix the situation while continuing to grant forbearances to those in need during the COVID-19 pandemic.
There has already been some positive movement on this front, as the Federal Housing Finance Agency (FHFA) announced that servicers will only be obligated to cover four months of missed payments on a loan. Yet, this does not address the tax payments and insurance these companies have to cover. Additionally, for small servicers, if the rate of forbearance requests rise as high as expected, covering four months of payments will be untenable.
This is why a broad coalition is asking FHFA, the Federal Reserve and the Department of the Treasury to establish a liquidity facility for servicers as a follow up to the CARES Act.
This is a priority for the entire country, Alabama included. Nationally, the coalition includes the likes of the Mortgage Bankers Association, National Association of Realtors, National Association of Home Builders, Independent Community Bankers of America, Leading Builders of America, Local Initiatives Support Corporation, National Apartment Association, National Association of Affordable Housing Lenders, National Council of State Housing Agencies, National Housing Conference, National Multifamily Housing Council, The Real Estate Roundtable, Structured Finance Association, Up for Growth Action and U.S. Mortgage Insurers.
Alabama Association of Realtors CEO Jeremy Walker told Yellowhammer News, “For our members, the ability to access capital is a critical component — a foundation — of any real estate development and of home buying in general. Our association will support this effort in Washington to increase liquidity access for lenders. It’s a must.”
The real estate industry in Alabama accounted for $33 billion or 14% of gross state product in 2019. Every time a home is bought or sold in the state, the average impact to a local economy is $65,000 from direct housing related purchases, services and improvements.
Walker added that Realtors believe that liquidity for banks and mortgage service providers will help provide a stable lending environment for borrowers, home buyers, small business owners, builders and developers. With a stable lending environment, the real estate industry is poised to play a leading role in Alabama’s economic recovery effort as America emerges from the COVID-19 pandemic, he concluded.
U.S. Senators Richard Shelby (R-AL) and Doug Jones (D-AL) both sit on the Senate Committee on Banking, Housing, and Urban Affairs. This committee has oversight over FHFA. Shelby is a former chair of the committee.
Sean Ross is the editor of Yellowhammer News. You can follow him on Twitter @sean_yhn
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