A bipartisan group of U.S. senators on Wednesday urged federal regulators to provide liquidity to non-bank lenders who say a mortgage crisis is looming due to a potential shortage of cash as borrowers stop making payments during the coronavirus pandemic.
The seven senators sent a letter to Treasury Secretary Steven T. Mnuchin, who is chairman of the Financial Stability Oversight Council (FSOC), a day after the head of the Federal Housing Finance Agency said he sees “zero evidence” the federal government needs to intervene.
“Given that we could see as much as $100 billion in mortgage payments forborne through this program, it presents an existential threat to these companies, and thus to the broader mortgage market,” the senators wrote in the 1,100-word letter.
A coalition of 15 mortgage, housing and real estate organizations have urged the FHFA and other regulators to create a liquidity facility to support non-bank mortgage lenders. They say it is necessary to ensure cash is available to mortgage lenders who may need financial support as they help borrowers during the coronavirus pandemic.
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.
The law requires lenders to approve forbearance if requested by the borrower. The Mortgage Bankers Association released a report Tuesday that found forbearance requests grew by 1,270 percent between the week of March 2 and the week of March 16, and another 1,896 percent between the week of March 16 and the week of March 30. The share of loans in forbearance grew from 0.25 percent to 2.66 percent between March 2 and April 1.
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.
FHFA Director Mark Calabria told the Wall Street Journal this week, “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.”
Democratic Sens. Mark R. Warner of Virginia, Tim Kaine of Virginia and Bob Menendez of New Jersey and Republican Sens. Mike Rounds of South Dakota, Thom Tillis of North Carolina and Tim Scott of South Carolina disagree.
“Given the magnitude of the economic stress that many Americans will face as a result of the virus, and the early numbers we are seeing from lenders across the country, it is likely that many families will be unable to make their payments as scheduled, triggering widespread participation in the program, with potentially up to 25 percent of borrowers seeking assistance,” the senators wrote to Mnuchin.
“While this is a reminder of the program’s importance, it also presents a challenge. As you know, the companies to which borrowers would normally make these payments, mortgage servicers, are obligated to pass those amounts on to investors, whether borrowers make them or not. Thus, as borrowers participating in this program don’t send in their payments, the mortgage servicers will have to step in to pay investors on their behalf.”
The senators warned that “as weaker nonbank mortgage servicers begin to struggle they may be forced to unload their mortgage servicing rights (MSRs) to stay afloat. This will drive down the value of MSRs generally, reducing the value of the assets of all other nonbank lenders. This will deteriorate the financial position of healthier nonbank lenders so that they face some of the same risks that forced the less healthy nonbank lenders into a sell-off. At best, we are disabling a large swath of previously healthy lenders at the worst possible time. At worst, we may be risking a downward spiral.”
Read the full letter here.