By Matt Scuffham
NEW YORK (Reuters) – Members of an influential financial markets advisory panel are pressing the Federal Reserve to give mortgage service companies emergency funding as struggling borrowers rush to delay their repayments, two people involved in the talks told Reuters.
On Tuesday, the Mortgage Bankers Association (MBA) said borrower requests to delay mortgage payments rose 1,900% in the second half of March, as millions of Americans suffer job losses and slashed wages as businesses shut down to mitigate the spread of the novel coronavirus.
The surge in delayed payments could leave mortgage service companies, which pool home loans and sell them to investors, with a liquidity shortfall of as much as $100 billion over the next nine months, according to the MBA. That is because mortgage servicers still have to advance scheduled payments to investors even if the end borrowers fail to make their payments.
A federal facility to cover the liquidity shortfall until borrowers resume repayments could prevent mortgage servicers from failing, the two sources said.
Ginnie Mae, a government-run issuer of mortgage-backed securities, said last month it would provide assistance to some mortgage servicers. But calls are growing for market-wide assistance to prevent mortgage origination from seizing up.
Members of the Treasury Borrowing Advisory Committee (TBAC), which advises the U.S. government on the strength of the economy and debt issuance, want a similar facility to cover loans backed by government-run housing finance giants Fannie Mae and Freddie Mac, which cover a far larger proportion of the overall market.
The central bank and the U.S. Treasury, which have already taken a series of measures called for by TBAC members to support financial system liquidity, may intervene, depending on how many borrowers seek forbearance this month, the two sources said.
Fed officials have discussed with members of TBAC in recent days ways the central bank could prevent systemic issues developing in the mortgage market, as happened during the 2008 financial crisis, both sources said.
They added that the Fed could use its powers under Section 13(3) of the Federal Reserve Act, which it has used in recent weeks to provide other emergency funding, to throw a liquidity lifeline to mortgage servicers. It could use the Treasury’s $454 billion Exchange Stabilization Fund, created decades ago for emergencies, to fund the facility, the sources said.
Any such intervention would have to be approved by the Treasury, which is currently assessing the potential liquidity challenges for mortgage servicers as part of a special task force created by Secretary Steven Mnuchin last month.
The Treasury will decide whether to give the go-ahead once that task force has assessed how many borrowers are likely to delay payments in coming weeks and the size of the potential liquidity shortfall, both sources said.
The Fed and the Treasury declined to comment.
As part of last month’s $2.3 trillion congressional rescue package, lenders must allow struggling borrowers to postpone mortgage payments. The law allows borrowers of mortgages backed by government entities Fannie Mae and Freddie Mac to delay up to a year’s worth of repayments, depending on the circumstances.
That has made life tough for non-bank mortgage companies, which stepped into the market after traditional banks withdrew from mortgage lending following the 2008 financial crisis. Compared with traditional banks, mortgage servicers have less capital to absorb losses or fund liquidity shortfalls.
Non-bank mortgage providers accounted for around three-fifths of originations nationally in the fourth quarter, according to Inside Mortgage Finance, which tracks residential mortgages.
The MBA, which has also been lobbying the government to support the industry, estimates that non-bank mortgage lenders would be on the hook for $12 billion of payments a month if 25% of borrowers secure payment holidays – which none could afford over an extended period.
If mortgage servicers are unable to pay, investors in mortgage-backed securities could retreat from the market, removing a key source of funding that would dampen mortgage lending and hurt the country’s economic recovery, economists say.
“This would be a bridge too far for many in the industry,” analysts at Raymond James said on Monday. “A federal liquidity facility to bridge the gap will be essential.”
(Additional reporting by Pete Schroeder; Editing by Michelle Price and Dan Grebler)
