The Federal Housing Finance Agency announced Tuesday that mortgage lenders will only have to cover four months of missed payments from borrowers under forbearance during the coronavirus pandemic. The change applies to all mortgage lenders managing Freddie Mac or Fannie Mae backed loans.
FHFA, which had been under intense pressure to provide relief to lenders, said that mortgage servicers with Fannie and Freddie loans will have “no further obligation to advance scheduled payments” to creditors after four loan payments have been missed. In short, the announcement means the loans in forbearance due to the coronavirus can be kept in mortgage-backed security pools as long as they are in forbearance.
“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market,” FHFA Director Mark Calabria said. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”
Calabria said earlier this month that he expected only 300,000 Fannie and Freddie loans – roughly 1 percent – would go into forbearance in April. The Mortgage Bankers Association announced Monday that 4.64 percent of those loans were in forbearance as of April 12.
Calabria and FHFA have been at the center of a heated debate among regulators, mortgage lenders and members of Congress about the need of the federal government to provide liquidity support to non-bank mortgage lenders.
That is something MBA said it still badly needed.
“While this news reduces servicers’ worst-case cash flow demands considerably, we continue to stress the need for Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it in order to continue to make payments to investors, municipalities, and insurers on behalf of borrowers who have been granted forbearance required under the CARES Act,” MBA President and CEO Robert D. Broeksmit said in statement.
Still, the announcement is an about-face by Calabria, who told the Wall Street Journal, “I’ve seen zero [evidence] to suggest that there’s a systemic crisis across the nonbank servicers. If this goes on for a year, maybe. But I think the frustration here is a lot of just misrepresentation.” He dismissed their complaints as “spin.”
The $2 trillion CARES Act comes with significant benefits for homeowners who are unable to make their mortgage payments, most notably a moratorium on foreclosures and the right to forbearance. Forbearance allows borrowers with a federally backed mortgage to put off payments for at least six months if they suffer economic hardship during the pandemic.
MBA reported that 5.95 percent of all loans were in forbearance by April 12 – up from 0.25 percent of loans in forbearance on March 2.
The MBA estimates that the burden on lenders could range from $75 billion to $100 billion or higher if one-quarter of borrowers take advantage of forbearance for six months or longer.
At issue is how lenders cover the cost of a mortgage that is in forbearance. As FHFA explains, “When a mortgage loan is in a Mortgage-Backed Security (MBS), Fannie Mae servicers are responsible for advancing the principal and interest payment regardless of borrower payments. Freddie Mac servicers, who are generally responsible for advancing scheduled interest, are only obligated to advance four months of missed borrower interest payments. Today’s instruction establishes a four-month advance obligation limit for Fannie Mae scheduled servicing for loans and servicers which is consistent with the current policy at Freddie Mac.”
FHFA said that loans that are delinquent for more than four months historically were purchased out of MBS pools by the Enterprises. The announcement Tuesday means coronavirus forbearance cases will be treated like a natural disaster and remain in the MBS pool.
Ralph B. McLaughlin, the chief economist at Haus, pondered what the announcement means for mortgage-backed securities.
“Passing it on down the line. Wonder what the MBS markets are going to look like in the next few months,” he said in a Tweet.
Analyst Joshua Rosner said FHFA’s move is useful in that it provides greater certainty to servicers regarding the amount of monthly principal and interest they will have to advance on loans.
“While this is helpful to servicers and could, depending on the length of the crisis, prevent liquidity driven failures of some of these firms, it is not likely to have a dramatic impact on the ultimate credit loss risk to private mortgage insurers or (Fannie and Freddie),” Rosner said.
He added that the changes will increase liquidity demands on the Fannie And Freddie (GSEs), but it does not create any new credit risks or capital costs to them.
“It merely shifts the liquidity demands, after four months of possible forbearance, from the servicers to the GSEs,” Rosner said. “This is a strong positive for servicers and will provide support to the agency mortgage origination and servicing channels.”