“The mortgage market has more risk than previously acknowledged.”
By Wolf Richter for WOLF STREET.
The Government-Sponsored Enterprises Fannie Mae and Freddie Mac, and the government agency Ginnie Mae, which guarantee $7.5 trillion in mortgages and turn them into mortgage-backed securities (MBS), have rolled out a wide-ranging support package for homeowners with mortgages that they guarantee, in order to keep the mortgage market from collapsing.
One of those measures is their support for “mortgage forbearance.” And homeowners are now picking up on it, according to the Mortgage Bankers Association. But it has thrown the entire mortgage market, including MBS, and every business in it, upside down.
Generally, in a mortgage forbearance agreement, the lender agrees not to exercise its legal right to foreclose on the delinquent mortgage, and the borrower agrees to a mortgage plan that will require the borrower to eventually become current again. These are not free gifts or grants, but deferrals.
The stimulus package, signed into law on March 27, mandates that all borrowers with government-backed mortgages be allowed to delay for at least 90 days their monthly mortgage payments.
The plan offered by Fannie Mae and Freddie Mac and similar plans offered by Ginnie Mae, the FHA, and the VA, go a lot further:
“Homeowners impacted by this national emergency are eligible for a forbearance plan to reduce or suspend their mortgage payments for up to 12 months.”
During that forbearance period of up to 12 months, homeowners won’t have to make mortgage payments. They will not incur late fees. They will not be reported to the credit bureaus, so this won’t hit their credit score. And after forbearance, the mortgage servicer “must work” with them “on a permanent plan to help maintain or reduce monthly payment amounts as necessary, including a loan modification.”
This is a sweet deal for homeowners. Yes, the deferred payments will have to be rolled into the rest of the mortgage, but it will be a modified mortgage, perhaps with stretched terms and lower rates, etc.
And this is just the beginning.
Homeowners have been flooding the call centers of mortgage servicers to get one of those forbearance agreements. To track this new trend, the Mortgage Bankers Association came up with its new weekly report on forbearance. It details some of the first effects of these policies, based on 22.4 million mortgages serviced, representing about 45% of the total mortgage servicing market.
Even the forbearance report is brand new. There had never been a need to track this on a weekly basis. Now there is – with forbearance becoming part of the new normal. It found:
- Between the week of March 2 and the week of March 16, forbearance requests grew by 1,270%.
- Between the week of March 16 and the week of March 30, forbearance requests grew by another 1,896%.
- Forbearance requests already exceed 2 million.
- Average hold times at mortgage servicers’ call centers jumped from less than 2 minutes three weeks earlier, to 17.5 minutes.
- Average call abandonment rates jumped from 5% three weeks earlier, to 25%.
- Total loans in forbearance multiplied by a factor of over 10, from 0.25% of all loans on March 2 to 2.66% of all loans on April 1.
- Loans in forbearance at Ginnie Mae reached 4.25% of all loans.
An estimated 2 million borrowers already missed mortgage payments by the end of March, Mark Calabria, director of the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, told CNBC.
Some estimates – and they could be purposefully exaggerated to trigger a bailout for the nonbank mortgage servicers – say that forbearance will reach 25% of government-backed mortgages.
But when homeowners don’t have to make payments for up to a year, it throws the entire mortgage market upside down. And one of the side-effects is that it puts mortgage servicers into a liquidity crunch.
Mortgage servicers – banks and nonbanks – collect payments from homeowners and pass them on to investors who hold mortgage-backed securities (MBS) issued by Ginnie, Fannie, Freddie, and the like.
Mortgage servicers have a contractual obligation to continue to make the payments to MBS holders even if homeowners become delinquent. Servicers will be reimbursed by the government-backed entities, but that can take several months. So they’re temporarily on the hook but will eventually get their money back.
This is not a problem normally, when just a few mortgages become delinquent. But homeowners are now in a mad scramble to get these forbearance deals and suspend mortgage payments. And a significant portion of the mortgages these servicers handle could eventually be under a forbearance agreement.
Banks have large cash reserves – the “reserves” that they keep around or deposit at the Fed. In addition, the have liquidity support from the Fed and can borrow at the discount window at 0.25%. So they’re not threatened by forbearance agreements.
But nonbanks (or “shadow banks”) have neither. They’re not regulated by the Fed and other banking regulators, and they don’t have the capital requirements and reserve requirements that banks have. And now they don’t have the reserves to get through this crisis.
How did they get there?
The largest mortgage lender and servicer in the US used to be Wells Fargo, after it had acquired Wachovia (deal closed in January 2009), which was collapsing, and regulators had told it to find a buyer. Wachovia was the fourth-largest bank holding company in the US at the time. This misbegotten deal doubled the size of Wells Fargo and made it the largest mortgage lender in the US. But the losses from the Wachovia mortgage book were huge during the housing bust.
Other banks went through a similar program. For example, in January 2008, and predating the Wells Fargo deal, Bank of America was arm-twisted by regulators into acquiring Countrywide Financial, which was collapsing. Countrywide was the largest mortgage lender in the US in 2006. This deal turned BofA into the largest mortgage lender, until Wells Fargo dethroned it with the Wachovia deal. BofA also ended up with huge losses and endless legal problems stemming from Countrywide.
Reeling from these types of misadventures, banks pulled back from mortgage lending coming out of the Financial Crisis.
And nonbanks took over. A gaggle of them collapsed during the Financial Crisis and weren’t bailed out. But the survivors got aggressive. They didn’t have bank regulators breathing down their necks, and they could do what they wanted. Now the largest mortgage servicer is Quicken Loans. And there’s a slew of other big ones.
Now Bailout City.
These nonbank servicers are now squealing and lobbying to high heaven for a bailout from Ginnie, Fannie, and Freddie. Ginnie, which is a US government agency, already caved and announced that it would set up a liquidity facility for servicers of its loans. Fannie and Freddie, which strive to become independent companies, have not yet caved.
This squealing about a liquidity crunch is just “spin,” said the FHFA’s Mark Calabria. In the interview, he told the Wall Street Journal that he doesn’t see it as the role of Fannie and Freddie, which the FHFA overseas, to help the mortgage servicers.
“I’ve seen zero [evidence] to suggest that there’s a systemic crisis across the nonbank servicers,” he said. “If this goes on for a year, maybe. But I think the frustration here is a lot of just misrepresentation.”
The role of Fannie and Freddie in a downturn is “not to bail out people in the industry,” he said. “Their countercyclical role is to provide mortgage credit, and I see no evidence that that is not happening.”
“I’m trying to preserve their safety and soundness,” he said. “They simply don’t have the capital” to bail out the shadow banks.
He also said that Fannie and Freddie may have to transfer mortgage servicing to bigger servicers if smaller servicers don’t have the cash reserves to fund the forbearances for the time-span needed.
His refusal to bail out the shadow banks was instantly attacked by the Mortgage Bankers’ Association, which in the same breath then asked for a bailout of the shadow banks by the Fed and the taxpayer.
“We also strongly disagree with his characterization of the customer experience as it relates to the size of a mortgage servicer,” the MBA’s statement said.
“The Director’s [Mark Calabria] unwillingness to offer support from Fannie Mae and Freddie Mac for the very firms that he and Congress asked to execute his agency’s forbearance plan only reinforces why the Federal Reserve and U.S. Treasury must create a financing program to help residential and commercial/multifamily mortgage servicers who will have to provide unprecedented levels of mortgage payment forbearance,” it said.
This type of Fed liquidity facility would be similar to other Special Purpose Vehicles (SPVs) that the Fed in conjunction with the Treasury Department has already set up to bail out a garden variety of companies and markets. The Fed, which is in total bailout mood, could easily do that.
Fed Chair Jerome Powell already indicated yesterday in a Webinar at Brookings that the Fed was looking at it. If you squeal loud enough, you’ll get a Fed bailout.
What does this blowup show?
“The mortgage market has more risk than previously acknowledged,” said the American Enterprise Institute, which among other things covers the housing market and housing policy, in its presentation on the housing bailout and the liquidity challenges resulting from it. It was particularly pointing at the FHA’s large book of high-risk, low-down-payment loans, lending targeted to first-time buyers, investor loans, and refinance loans.
“The federal government’s dominance in the under-capitalized US housing finance system means many of these stresses will land on Treasury, Ginnie, the Fed, & FHFA’s doorsteps,” it said.
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