By Matt Scuffham
NEW YORK (Reuters) – The U.S. residential mortgage finance market faces severe stress after the industry failed this week to convince regulators to launch an emergency liquidity facility needed to bridge billions of dollars of missed home loan repayments, industry sources and analysts have warned.
The Federal Reserve on Thursday announced fresh measures to support businesses hurt by the novel coronavirus disruption but failed to launch a funding facility for mortgage servicers despite intense industry lobbying in recent days.
“The housing finance industry is about to collapse,” Odeon Capital analyst Dick Bove warned in a note on Wednesday, saying that a law passed by Congress last month allowing homeowners to delay repayments for up to a year could be a “death knell” for mortgage servicers.
The Fed declined to comment for this story, but Chair Jay Powell on Thursday said that the central bank was carefully watching mortgage servicers” and “will have our eyes on that as a key market.” The U.S. Treasury Department, which would have to approve any liquidity facility, declined to comment.
Requests to delay mortgage payments rose 1,900% in the second half of March, according to Tuesday data from the Mortgage Bankers Association (MBA), which is leading the lobbying effort.
That could leave mortgage servicers, which pool home loans and sell them to investors, with a liquidity shortfall of as much as $100 billion over the next nine months, the MBA said.
That is because non-bank mortgage servicers, which have much less capital and liquidity than banks, still have to make payments to investors even if borrowers fail to make theirs.
“Some of them don’t have the means to do so,” said Ajay Rajadhyaksha, head of macro research at Barclays and a member of the Treasury Borrowing Advisory Committee (TBAC), which advises the Treasury on debt management and the economy.
Some TBAC members want the Fed to create a liquidity facility, using Treasury funds, to help servicers meet their obligations, Reuters reported on Tuesday.
Bob Broeksmit, chief executive of the MBA, told Reuters the group had held “very productive” discussions with the Fed and the Treasury, but the agencies have so far stopped short of committing to a facility.
That is partly because they want to see how many borrowers seek and are granted payment holidays over the coming weeks, one person with knowledge of the talks said. New forbearance data is expected next week.
The MBA, which represents firms such as Quicken Loans, SunTrust Mortgage and Regions Mortgage, wants the Fed to move quickly because a facility may take weeks to implement after a decision is made.
Servicers are due to begin paying advances to investors for April next Wednesday, industry sources say.
The urgency of the situation grew this week after Mark Calabria, director of the Federal Housing Finance Agency, said that Fannie Mae and Freddie Mac, the government-run entities that guarantee payments on roughly 50% of home loans, don’t have enough capital to bridge the liquidity gap either.
That leaves a Fed facility as the only option to avert a meltdown in the residential mortgage market, some analysts say.
“Arguably, a lot of these servicers are becoming systemically important,” said Deeksha Gupta, assistant professor of finance at Carnegie Mellon University. “They own huge amounts of the mortgage market and if they go under we may be looking at a crisis similar to what we saw in 2008.”
(Reporting by Matt Scuffham; Editing by Michelle Price and Steve Orlofsky)
