The mortgage industry on Sunday urged the Treasury Department and Federal Reserve to take additional emergency steps to ensure money is available to lenders at a time when borrowers may be slow to make their mortgage payments amid the COVID-19 pandemic.
The Mortgage Bankers Association called for an increase in the scope of mortgage-backed securities (MBS) and the development of a facility to support mortgage lenders in anticipation of widespread delays in payments from property owners.
“We believe these actions should be taken as urgently and swiftly as possible to counter volatility in the market, protect consumers, and ensure all market participants that the liquidity strains being caused by COVID-19 do not escalate into solvency problems throughout financial markets,” MBA President and CEO Robert D. Broeksmit wrote in a letter to U.S. Treasury Secretary Steven T. Mnuchin and Fed Chairman Jerome Powell.
Stabilizing The MBS Market
Specifically, Broeksmit pointed to the recent volatility in the market-backed securities market, which is in turn driving interest rates higher after they reached near historic lows earlier in the month.
“As mortgage interest rates have risen, the ability of homeowners to refinance their loans – a potentially powerful form of stimulus in a recession – has been stalled,” he said.
MBA recommended that the Federal Reserve significantly expand its agency MBS asset purchase operations to above the $200 billion minimum specified by the Federal Open Market Committee (FOMC) on March 15. “Rather than provide a target for total agency MBS purchases, the FOMC should commit to increasing its purchases to the level necessary to stabilize the agency MBS market and, as a result, mortgage interest rates in the primary market,” Broeksmit said.Cash Shortages
Potential Cash Shortages
A liquidity facility for the residential mortgaging sector would make funds availability to lenders who are extending flexibility to borrowers. As homeowners cope with economic hardship during the pandemic, many lenders – including Bank of America, Quicken Loans, Fifth Third Bank and others – are offering borrowers flexibility with payments. That includes forbearance, which is a temporary pausing of mortgage payments.
While that will help individual homeowners, Broeksmit warned that it could create a “severe liquidity shortage that will befall the housing finance system.”
MBA estimates that the burden on borrowers could range from $75 billion to $100 billion or higher if approximately one-quarter of borrowers take advantage of forbearance for six months or longer.
“Mortgage servicers maintain liquid reserves to cover these advances when borrowers miss their payments, but virtually no servicer, regardless of its business model or size, will be able to make sustained advances during a large-scale pandemic when a significant portion of borrowers could cease making their payments for an extended period of time,” he wrote.
Broeksmit said the facility would be similar to the Fed’s establishment last week of emergency facilities to support liquidity for commercial paper and money market mutual funds.
See the full letter here.